CORPORATE GOVERNANCE AND 

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BEFORE THE

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INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 21, 2010 

Printed for the use of the Committee on Financial Services 

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SHAREHOLDER EMPOWERMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 21, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–125 

( 

(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 

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 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 21, 2010 ................................................................................................... 1 

Appendix: 

April 21, 2010 ................................................................................................... 47 

WITNESSES 

WEDNESDAY, APRIL 21, 2010 

Allen, James, Head of Capital Markets Policy, CFA Institute ............................ 20 

Brier, Thomas F., Deputy Chief Investment Officer and Director of Corporate 

Governance, Pennsylvania State Employees’ Retirement System ................... 12 

Cutler, Alexander M., Chairman and Chief Executive Officer, Eaton Corporation, on behalf of Business Roundtable .............................................................. 14 

Irwin, Hon. Steven D., Pennsylvania Securities Commissioner, and Chairman, 

Federal Legislation Committee, North American Securities Administrators 

Association, Inc. (NASAA) ................................................................................... 8 

Rees, Brandon J., Deputy Director, Office of Investment, AFL-CIO ................... 16 

Smith, Gregory W., Chief Operating Officer and General Counsel, Colorado 

Public Employees’ Retirement Association ........................................................ 11 

Smith, Robert E., Vice President, Deputy General Counsel, and Assistant 

Corporate Secretary, NiSource, Inc., on behalf of the Society of Corporate 

Secretaries and Governance Professionals ......................................................... 18 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 48 

Allen, James ...................................................................................................... 49 

Brier, Thomas F. ............................................................................................... 53 

Cutler, Alexander M. ........................................................................................ 64 

Irwin, Hon. Steven D. ...................................................................................... 300 

Rees, Brandon J. ............................................................................................... 312 

Smith, Gregory W. ............................................................................................ 319 

Smith, Robert E. ............................................................................................... 339 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of the Investment Company Institute (ICI) ................... 380 

Written statement of Carl C. Icahn ................................................................ 391 

Written statement of Tom Gardner, CEO, The Motley Fool Holdings, 

Inc. ................................................................................................................. 396 

Castle, Hon. Michael: 

Written statement of various undersigned groups ........................................ 399 

Hensarling, Hon. Jeb: 

Written statement of the Center On Executive Compensation .................... 401 

Allen, James: 

Addendums to written testimony .................................................................... 407 

Rees, Brandon J.: 

Additional information provided for the record ............................................. 409 

(1) 

CORPORATE GOVERNANCE AND 

SHAREHOLDER EMPOWERMENT 

Wednesday, April 21, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Hinojosa, Baca, Maloney, Bean, Perlmutter, Carson, Adler, Kilroy, Kosmas, Peters; Garrett, Castle, Manzullo, Hensarling, Campbell, and 

Jenkins. 

Also present: Representative Ellison. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

Pursuant to the committee rules, each side will have 15 minutes 

for opening statements. Without objection, all members’ opening 

statements will be made a part of the record. 

I ask unanimous consent that Mr. Ellison, a member of the full 

Financial Services Committee, be allowed to participate in today’s 

subcommittee hearing and to offer an opening statement. Without 

objection, it is so ordered. 

Good morning. Today, we meet to consider several thoughtful 

bills that seek by various means to correct the imbalance of power 

between investors and management. For far too long at too many 

public companies, corporate executives have had the upper hand. 

The financial crisis revealed at times vividly and shockingly how 

all too frequently corporate management and boards failed to consider the long-term interests of their shareholders. As a result, innocent investors incurred monumental losses, even while corporate 

chieftains escaped the inferno unscathed, usually by golden parachute. 

It is clear that the deck was stacked, especially when you consider that Wall Street bankers took home enormous paychecks 

while the taxpayers got stuck with the bill. We now need to chart 

a different course. Congress must act to democratize corporate governance rules so that investors have a greater say in the companies 

that they own. 

2 

First and foremost, we ought to provide shareholders with easier 

means of getting directors nominated. Also, we should act to improve transparency by requiring many institutional investment 

managers to disclose how they vote on shareholder proxies. 

In the run-up to the crisis, excessive leverage and risk-taking became the norm on Wall Street. These decisions flew in the face of 

financial stability and lacked a fundamental level of good judgment. We can fix this problem by requiring public companies to 

form independent risk management committees with prescribed 

functions and duties. 

While the ideas in each of the bills before us are well-intended, 

we also need to carefully examine each proposal. As for the appealing idea of separating the role of chairman from that of chief executive officer, we should explore how such a policy will affect small 

companies. 

Requiring majority voting for uncontested directors also appears 

a worthy goal, but we must determine if it could produce inadvertent problems, especially if too few shareholders vote. 

As part of last year’s debates on the Wall Street Reform bill, our 

committee has already acted to improve corporate governance laws. 

As passed by the House, H.R. 4173 contained important provisions 

on proxy access and executive pay. It is my hope that the Senate 

will act with all deliberate speed on its reform legislation so that 

these important corporate governance reforms can become law. 

In the meantime, we must advance the debate about how we can 

further enhance corporate governance through increased transparency, better executive accountability, and greater shareholder 

rights. 

In this regard, I look forward to the testimony today and thank 

the witnesses for appearing. 

I would also like to thank Congressman Peters, Congressman 

Ellison, and Congresswoman Kilroy for their hard work on these 

important policy matters. 

The gentleman from New Jersey, our ranking member, Mr. Garrett, is recognized for 4 minutes. 

Mr. GARRETT. I thank the chairman. I thank all the witnesses 

today. An angle that I have taken to consider the multitude of 

pieces of legislation and proposals put forward since the recent financial crisis is how do each one of these proposals actually address one of the underlying causes of the financial crisis? 

So far, it has not been demonstrated to me convincingly that 

broadly speaking, the crisis was a result of corporate governance, 

a weakness in corporate governance, and more specifically, I remain to be convinced that the particular proposals put forward in 

Congressman Peters’ bill and the other related proposals would 

have either prevented the current crisis or would in fact be a net 

positive for corporations going forward. 

Just as an aside, philosophically speaking, being the chairman 

and founder of the Congressional Constitution Caucus, I am really 

hesitant to over turn 150 years of precedent in which corporate 

governance has been decided at the State level. 

I am also very weary of the Federal Government taking on new 

tasks not envisioned by our founding fathers, especially when the 

3 

States have shown they are basically perfectly capable to address 

these situations. 

The proposals that are being marketed by the supporters as remedies to the financial crisis, I think we really do need to keep in 

mind that they would apply to all companies, all public companies, 

big and small, financial and non-financial as well. 

Creating this one size-fits-all-mandate, for instance, with a proposal that mandates that every public company have a separate 

chairman and CEO, that is really not an appropriate so-called ‘‘solution’’ for many of the companies out there. 

The thing about practical examples of that, some of the great 

business leaders in modern times, people like Bill Gates, Warren 

Buffett, Sam Walton, they have all held the same role at the same 

time and they have done pretty well at it. They created billions of 

dollars for shareholder values while also creating literally millions 

of jobs for this country. 

Most companies, I think, are happy to provide a rationale for 

having the same person hold both positions, if that is what the particular board thinks is best for that company. 

Again, no mandate that each and every company must separate 

the two roles is going to be an appropriate policy solution for every 

company. Besides, many of the proposals being put forth are already being adopted, I guess you could say, organically by many of 

the companies out there. In some cases, a resounding majority of 

the stockholders of the companies out there are taking these views. 

We also need to remember that board members have a fiduciary 

duty to set corporate policy and make decisions based on creating 

long-term value for the firm, and with the recent corporate scandals now in the spotlight, pressures are on board members more 

than ever to do just that, and to do the right thing on behalf of the 

companies they serve. 

Giving increased powers to certain shareholders in a corporate 

policymaking process on the other hand, while it may be well-intentioned, I am sure, could actually have the unintended consequences of serving interests of more short-term goals while also 

introducing other agendas not directly associated with the best interest of that particular company into its corporate governance decision-making process. 

When you think about it, this would really be an ironic outcome 

indeed, since the focus would now be on short-term gains as often 

cited as a contributing cause of the recent financial crisis. 

In addition to the proposals contained in this legislation under 

consideration today, there are other areas, such as the role played 

by proxy advisor services, as well as proposals to increase retail 

shareholder voting, and direct communication with shareholders. I 

will be interested to hear from the panel before us later on. 

In conclusion, at a time when the number one priority of this 

Congress should be enacting policies that create jobs, I fear that 

many of the proposals put forth in the legislation under consideration at today’s hearing, as I said before, that I am sure are well 

intended, will have the unintended consequences of hurting the 

long-term ability of firms to do just that, create jobs, to thrive, either because of inappropriate one-size-fits-all policymaking or increased focus on short-term goals. 

4 

Finally, yet another increase in the Federal Government’s role in 

our economy, especially at the SEC, which has really yet to demonstrate that it can perform its primary role of protecting investors, also does not seem to be the best prescription for fixing our 

economy’s long-term health. 

With all that being said, I look forward to hearing all the witnesses today. 

Chairman KANJORSKI. Thank you, Mr. Garrett. We will now hear 

from Mr. Peters from Michigan for 3 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. Thank you, Chairman 

Kanjorski, for holding today’s hearing to discuss legislation that I 

believe would be not only important to improve corporate governance but also lead to a more stable economy as well. 

During the 111th Congress, this committee has held numerous 

hearings to investigate the causes of the collapse of the financial 

sector in the fall of 2008. While there were many contributing 

causes of the financial crisis, I believe that one significant cause 

was the failure of corporate governance of shareholders, including 

over 100 million Americans who own stock either in individual accounts or through a mutual fund, who have lost trillions of dollars 

in savings as a result. 

However, corporate governance is an issue that affects the entire 

economy, not just the financial sector. While some of the most egregious examples of excessive risk-taking and compensation have 

been found on Wall Street, there are plenty of other examples in 

other companies as well. 

I spent 22 years in the private sector and I believe the best and 

most effective regulation is self-regulation. That is why I believe we 

should empower shareholders, the company’s true owners, to hold 

corporate boards and management more accountable and help 

them better align their priorities with long-term value. 

As Members of Congress, we are held accountable to our constituents through meaningful democratic elections. However, in 

many corporations, management slates run unopposed and large 

long-term shareholders lack the ability to nominate their own candidates. Even worse, these nominees are elected even if a majority 

of shareholders vote against them. 

The current system of electing boards of directors, holding executives accountable and overseeing executive compensation is rigged 

against shareholders and in favor of management. The balance of 

power simply must change. 

Last December, the House passed the Wall Street Reform and 

Consumer Protection Act, which contained a number of provisions 

that will improve corporate governance. For example, it will give 

shareholders a vote on corporate compensation packages, it has improved disclosure of performance targets, and also includes language that would give the SEC authority to implement its proxy 

access rules. 

Soon, the Senate will be taking up comprehensive corporate governance reform legislation on its own. This legislation introduced 

by Senator Dodd contains a corporate governance title which includes many of the provisions which are in H.R. 2861, the Shareholder Empowerment Act. 

5 

We all agree that our corporations and boards need to focus on 

building long-term value for our shareholders. I introduced H.R. 

2861 because I strongly believe that it is the shareholders themselves who should have the power to oversee large complex institutions and hold corporate boards and senior management accountable for their mistakes and mismanagement. 

I look forward to hearing the testimony of the witnesses, and I 

would like again to thank Chairman Kanjorski for holding this 

hearing today, and I look forward to working with him to enact 

meaningful, comprehensive corporate governance legislation. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Peters. Now, 

we will hear from the gentleman from Delaware, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman, for holding today’s hearing. Corporate governance is an important issue to me and to this 

committee. I appreciate the opportunity to review current proposals 

and hear from experts on the impact of altering existing corporate 

governance laws. 

Some believe that corporate governance should be examined in 

response to the financial crisis, while others have expressed their 

intentions to add these sweeping changes onto a legislative response to a recent Supreme Court ruling on campaign finance. 

I believe that regardless of the legislative vehicle being discussed 

to push these issues forward, we must be especially careful when 

considering proposals that intrude on the province of State laws 

without taking into account their long-established histories and 

leadership on corporate matters and their ability to quickly respond to emerging issues. 

I understand that many of today’s witnesses will be commenting 

on Mr. Peters’ Shareholder Empowerment Act, which includes provisions to increase investor influence over corporate boards by allowing investors to dominate a candidate on the corporate proxy 

statement. 

The Peters’ bill also deals with the issue of requiring directors 

to receive majority voting. 

I am interested in learning from today’s witnesses their comments on the underlying concerns here that the proposed legislation is intending to respond to, and the efforts already under way 

to address some of these issues. 

For example, States have already begun to respond to the proxy 

access concerns by clarifying the authority of companies and their 

shareholders to adopt proxy access and proxy reimbursement bylaws. 

Similar changes are under consideration in the Model Business 

Corporation Act. Furthermore, shareholders already have the ability to place majority voting proposals on the proxy and 75 percent 

of boards now have some form of majority voting for directors. 

I look forward to the testimony of today’s witnesses and I yield 

back the balance of my time, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. We will 

now hear from the gentlelady from Ohio, Ms. Kilroy. 

Ms. KILROY. Thank you, Mr. Chairman, for your leadership on 

this issue and for the hearing this morning. 

6 

Today, we are taking a look at several proposals that will help 

strengthen corporate governance rules, an important undertaking, 

especially after what I learned yesterday at the hearing on Lehman 

Brothers. 

I look forward to hearing from the witnesses today, but I want 

to touch briefly on an exchange I had yesterday with Mr. Anton 

Valukas, the court-appointed examiner for the Lehman bankruptcy. 

I asked Mr. Valukas whether Lehman’s board of directors had a 

responsibility to stop Lehman’s senior managers from ignoring 

their own risk management system to pursue reckless and dangerous risks. Mr. Valukas replied that the risk management process Lehman had in place was good, although it was exceeded some 

30 times in a short period of time, and thus, under the business 

judgment rule, Lehman could go forward with their risky bets. 

Mr. Valukas went on to say that it is the regulators’ responsibility to step in when management is making a decision that could 

have such dire consequences for the larger economy, and I agree, 

but a first line of defense should come from the risk management 

directors and the boards of directors of these companies, who 

should have asked the right questions, who could have stopped 

management from taking those excessive risks that threatened the 

company and as we witnessed, the economy on the whole. 

For too long, the boards of these financial firms have rubberstamped their managerial decisions and for too long, corporate governance rules have been skewed in a way to preserve the status 

quo, to prevent shareholders from having a greater voice in how 

companies do business. 

The proposals we will discuss today could enhance transparency, 

increase shareholder power, improve management accountability, 

and enhance corporate governance. 

Thank you, Mr. Chairman, for your leadership on this important 

issue. I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Ms. Kilroy. Now, 

we will hear from the gentleman from Texas, Mr. Hensarling, for 

4 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. Coming into this 

hearing, as I come into many other hearings, I recall the President’s Chief of Staff, Rahm Emanuel’s, infamous adage, ‘‘Never let 

a serious crisis go to waste; it allows you to do things that you 

could not previously do before.’’ 

I see so many different ideas and pieces of legislation, some of 

which may be meritorious, all trying to be shoe-horned in on the 

idea that somehow this will prevent the next great economic crisis. 

I have looked at the underlying causes. I respectfully disagree 

with the gentleman from Michigan. I am trying to figure out where 

the corporate governance issue is. 

I believe there are some very legitimate corporate governance 

issues that we need to discuss as a society. Having said that, I am 

not exactly certain that the Federal Government is somehow 

uniquely qualified to mandate best practices for corporate governance. 

I think occasionally, if we look at the record in the underlying 

causes of our financial debacle, frankly, it was a lot of Federal legislation and Federal regulators. Who was the one who came up 

7 

with the brainchild of having Government-Sponsored Enterprises, 

be able to privatize their profits, socialize their losses, and then 

give them affordable housing and tell them you have to loan money 

to people to buy homes who ultimately cannot afford to stay in 

those homes. 

Maybe it was the bright people who came up with the idea that 

we ought to create an oligopoly in rating agencies. We know where 

that got us. 

Maybe it was the fine regulators at OTS who could have stopped 

AIG but did not. They had the regulatory authority we learned yesterday. The SEC had full regulatory authority to have Lehman account for their Repo 105 transactions, they did not. The SEC could 

have stopped them. They could have had Lehman Brothers reserve 

more capital, and lower their leverage, but they did not do it. 

Maybe it was those Federal people who came up with those great 

ideas. Maybe it was the bank regulators who said if you will concentrate your statutory capital in Fannie Mae and Freddie Mac, all 

will be fine. 

My point is as one who has spent a number of years in private 

enterprise and a number of years in government, I have not found 

that people in government are somehow uniquely smarter or more 

insightful than those in private business. 

Again, I believe there may be some legitimate debates over certain aspects of these proposals. To think that at this time that 

number one, corporate governance issues are somehow at the heart 

or even a significant contributing factor to the economic crisis, I 

just have not seen the evidence. I have an open mind. I just do not 

have empty mind. 

Second, to somehow think that the Federal Government is best 

positioned to make these decisions, particularly at a time when the 

Nation still has high unemployment, still a generational high, here 

is one more great uncertainty, one more great cost, one more great 

mandate to be thrown on the job creating sector in America, that 

perhaps maybe the Federal Government ought to let it do its business and get about creating jobs, which I think most of our constituents would agree, job number one ought to be creating jobs. 

Instead, here is yet another Federal takeover. Here are more 

Federal mandates that are going to harm jobs. Again, if this was 

just restricted to Wall Street, I just question why is the proposal 

going to impact every single publicly held company in America? 

Again, it is a huge overreach that could have devastating unintended consequences yet again on an economy that is struggling to 

create jobs. 

I approach this particular proposal with a lot of skepticism. Mr. 

Chairman, I yield back the balance of my time. 

Chairman KANJORSKI. Thank you, Mr. Hensarling. Now, we will 

hear from Mr. Baca for 1 minute. 

Mr. BACA. Thank you very much. I want to thank Chairman 

Kanjorski and Ranking Member Garrett for calling this hearing. I 

also want to thank all of the witnesses for being here today and 

offering your insights. 

Finally, I want to commend Mr. Peters, Mr. Ellison, and Ms. Kilroy for their hard work on this issue. 

8 

The events of the past years demonstrate the flaws in corporate 

structure and its governance. Too often, decisions are made by a select few without paying any regard to the interests or views of the 

shareholders. 

While the arguments of corporate efficiency is offered as a justification for the way things are done, I would point simply to September 2008 and its aftermath to show what this narrow-minded 

thinking can cause. 

Corporate boards find themselves in the position and are unresponsive to shareholders’ demands. Even if the shareholders want 

to change the structure, proxy rules and the corporate election 

process are often too expensive to be able to accomplish anything. 

Last year, the committee and this chamber took major steps to 

enact some of these changes, and hopefully these will be able to 

pass financial regulatory reform law soon. 

During this hearing, I will be interested to hear the reforms we 

need with regard to proxy access and corporate accountability. I 

also am eager to talk about the increased diversity within the 

boardrooms, allowing for more accurate representation, not only of 

the shareholders, but the market in which these corporations operate. 

I want them to look like what America looks like as well, and 

we do not see that. 

Again, I want to thank the chairman and the ranking member 

for their leadership on this issue. It is about time that we had oversight and accountability, and if we did not have government intervention, then we would not be here right now if there was not too 

much greed. 

I respect the gentleman’s comments. Yes, we do have higher unemployment, and we have had Federal mandates, but sometimes 

we need these Federal mandates to make sure there is accountability and oversight, and we are doing what is right for the American people. 

Thank you. I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Baca. 

Mr. Ellison has not arrived yet, so we will try to reserve some 

of his time that can be expanded when he comes for questioning. 

Now, we will go to the panel, and I want to thank you all for appearing before the subcommittee today. Without objection, your 

written statements will be made a part of the record. You will each 

be recognized for a 5-minute summary of your testimony. 

First, we have the Honorable Steven D. Irwin, commissioner, 

Pennsylvania Securities Commission. 

Mr. Irwin? 

STATEMENT OF THE HONORABLE STEVEN D. IRWIN, PENNSYLVANIA SECURITIES COMMISSIONER, AND CHAIRMAN, 

FEDERAL LEGISLATION COMMITTEE, NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, INC. (NASAA) 

Mr. IRWIN. Chairman Kanjorski, Ranking Member Garrett, and 

members of the subcommittee, the single most important task 

which confronts legislators and securities regulators is restoring 

public faith and confidence in American financial institutions. 

9 

Without a fair and honest landscape through which retail investors can work toward their financial goals, their activity will continue to suffer dramatic contractions. 

The loss of public confidence can be seen from our up-close and 

personal experiences with many who have withdrawn from the securities market. 

The Pennsylvania Securities Commission conducted nearly 500 

investor education presentations to residents in 62 counties during 

the last 2 years alone. Attendees related that they are worried 

about a secure retirement or paying for a child’s education. Many 

complain about their losses because of decreasing value of stocks, 

and others indicate fear of getting involved in the stock market altogether. Those who pulled out their money in order to not subject 

it to any more risk remain afraid to get back in. 

Beyond anecdotal concerns, the data substantiate that investor 

distrust is an ongoing phenomenon. The 200 day moving average 

volume on the New York Stock Exchange now is 1.2 billion shares. 

It is down nearly 25 percent from a year ago. 

As stock prices have risen over the past year, the lower volume 

of trading evidences that main street investors have largely stayed 

out of the market. 

Investors have not lost confidence because of a single event, but 

because of serial market abuses, from mutual fund timing schemes 

and misrepresentations concerning auction rate securities to 

Madoff’s and Stanford’s ponzi schemes. 

No one solution can restore investor faith and trust. However, 

this hearing builds on several significant steps already taken by 

this subcommittee and the full House in addressing the dangers to 

the U.S. economy. 

Businesses have evolved from a world where decision-makers as 

owners of their enterprises were responsible to theirselves and felt 

a sense of duty to their communities. Growth of enterprises and involvement of public investors led to a separation of ownership from 

control. From that separation, emerged disagreement over what 

constitutes fair compensation for management. 

Traditionally, government has not involved itself in the process 

whereby compensation is set. The present crisis has spotlighted a 

lack of input by shareholders into executive compensation in publicly held entities. Sadly, the line between fair and negotiated compensation and corporate looting and breach of fiduciary responsibility can be difficult to define. 

It has been a struggle to infuse good governance measures. Officers frequently can control board selection with compliant directors’ 

approving compensation packages that are designed by friendly 

independent consultants. Under this circumstance, conflicts of interest are ripe. 

Executive compensation has long thirsted for objective scrutiny. 

It is a component of corporate governance that seems understandable to the less sophisticated retail investor for whom it serves as 

a barometer of internal restraints and effective stewardship. 

A lead position in management does not bestow entitlement to 

hoard profits from shareowners. Growth and productivity demand, 

of course, an abundance of inducements for creativity and high 

level of performance. 

10 

At the same time, inducements must be tied to actual production 

of long-term value for shareholders, rather than to manipulation of 

financial results for the short-term. 

In this regard, we applaud the SEC’s recent efforts to allow for 

greater shareholder access to information, particularly amendments to proxy rules that require disclosure of risks arising from 

compensation policies. 

In 2007, State securities regulators adopted a resolution on disclosure concerning executive compensation and conflicts of interest 

underlying the process by which it is approved. 

The person in the street sees salaries of corporate decisionmakers steadily increased to a level viewed as obscene, while at the 

same time, the companies paying these salaries diminish in value. 

Ultimately, the funds to pay managers come from the owners of 

the corporation, the shareholders. A dollar doled to the manager in 

the form of augmented salary, bonus or stock options is a dollar 

less in corporate assets. 

The balance sheet should reflect the addition of a dollar or more 

of corporate value before it is paid. 

The little power shareholders have to influence executive compensation lies now in their right to sell their shares. An effective 

counter weight must avail them legal strategies that will enable 

them to press the issue. 

In order to have any material bearing, shareholders must have 

relevant and complete information. Sunlight is a renowned disinfectant, but disclosure cannot be the sole remedy. 

Shareholders possessing the knowledge and skills to do so must 

undertake independent analysis and aggressively articulate their 

concerns. They cannot stick their heads in the sand and ignore 

compensation abuses. 

Even with an evolution in corporate governance, financial regulatory reform will not regain the trust of Main Street unless Congress embraces extending fiduciary duty to all professionals who 

provide advice to investors. 

Reform must prevent abuse of the process by which capital is 

raised by those more interested in soliciting funds than promoting 

legitimate enterprises. 

Straightforward disqualification of repeat offenders of the rules 

of the game is a logical deterrent to such abuse. 

In closing, the unique experiences of my fellow State securities 

regulators on the front lines of investor protection have provided 

the framework for my testimony this morning. We commit to continuing to work with the subcommittee to afford the investing public the needed security to return to our capital markets. 

Thank you, Mr. Chairman. 

[The prepared statement of Commissioner Irwin can be found on 

page 300 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Irwin. 

Next, we will have Mr. Gregory W. Smith, chief operating officer 

and general counsel, Colorado Public Employees’ Retirement Association. 

Mr. Smith? 

11 

STATEMENT OF GREGORY W. SMITH, CHIEF OPERATING OFFICER AND GENERAL COUNSEL, COLORADO PUBLIC EMPLOYEES’ RETIREMENT ASSOCIATION 

Mr. GREGORY SMITH. Thank you, Chairman Kanjorski, Ranking 

Member Garrett, and members of the subcommittee. Good morning. 

I am Greg Smith, chief operating officer and general counsel of 

the Colorado Public Employees’ Retirement Association. I am 

pleased to appear before you today on behalf of Colorado PERA and 

our membership of over 460,000 current and past public servants 

of our State. 

Because Colorado is one of the first States to address the sustainability of its pension plan as a result of the 2008 crisis, each 

and every one of our members has sacrificed through reduced benefits, including our retirees. We are responsible for investment over $34 billion in assets on 

behalf of our members for the exclusive purpose of providing retirement benefits. 

Our obligation to pay benefits extends not only to today’s retirees 

but ultimately to those newly hired public servants who will work 

a 35-year career and then draw a monthly benefit for 20 or more 

years in retirement. 

As a result, our investment time horizon extends over 50 years. 

We and our peers are the market’s long-term investors, and the 

protection of a marketplace that promotes the creation of shareholder value for the long-term is imperative to the success of our 

mission. 

We should not be required to simply exercise the Wall Street 

walk and abandon our investment because management is undermining shareholder value or acting in their self-interest to the detriment of shareholders. 

We should be entitled as the owners who have put our capital 

at risk to insist that management be held accountable. This is not 

an unreasonable expectation, and the mechanism to accomplish 

this accountability is improved corporate governance, beginning 

with the creation of alignment between shareholder interests and 

the board of directors. 

As an owner of the Nation’s largest and most prominent corporations, our fund is strongly aligned with corporate America. We have 

every interest in its long-term success and profitability. 

However, Colorado PERA firmly believes that the global financial 

crisis represents a massive failure of board oversight as well as 

regulation. Our members have paid a steep price for these failures. 

Clearly, boards of directors failed to adequately understand, 

monitor, and oversee enterprise risk and corporate strategy. Far 

too many boards structured and approved executive compensation 

programs that motivated excessive risk-taking and yielded outsized 

rewards for short-term results. 

These failures of board oversight are the most recent demonstration that too many boards are dominated by management and have 

lost sight of the obligation to shareholders. 

We respectfully suggest that at its core, this is the result of the 

fact that shareholders effectively play no role in the selection of directors and have no ability to remove directors. 

12 

We are denied the basic tools that shareowners around the 

world, including countries with far less developed capital markets 

than ours, have long been provided. Rights such as requiring directors to be elected by a majority vote, giving investors an advisory 

vote on executive pay, and providing long-term owners modest vehicles to nominate directors on the company proxy card. Their absence significantly weakens the ability of shareowners to oversee 

corporate directors, their elected representatives, and hold them accountable. 

Turning to the content of the House bills advancing corporate 

governance reforms, we strongly commend the House for affirming 

the SEC’s authority to provide proxy access in the Wall Street Reform and Consumer Protection Act of 2009. 

In addition to that affirmation, the government’s improvements 

that Colorado PERA believes would have the greatest impact and 

therefore should be considered by the House include: requiring directors in contested elections to be elected by a majority of the 

votes cast; enhancing executive compensation disclosures; providing 

investors with an advisory vote on pay; ensuring compensation consultants provide independent advice; strengthening Federal 

clawback provisions for unearned pay, and requiring corporate 

boards to be chaired by an independent director. 

As the House considers steps to enhance corporate governance 

and empower shareowners, Congress must remember that boards 

are the first line of defense against the risks and excesses that led 

to the global financial crisis. 

Vigorous financial regulation on its own cannot solve many of the 

issues that contributed to the crisis. Regulators and investors must 

be given stronger market based tools to guarantee robust oversight 

and meaningful accountability of corporate managers and directors. 

House Bill 2861 consists of all of these provisions that I have 

identified, and we strongly support the principles set forth in that 

bill. 

Thank you for the opportunity to appear and we look forward to 

answering your questions. 

[The prepared statement of Mr. Gregory Smith can be found on 

page 319 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Smith. 

Next, we have Mr. Thomas F. Brier, deputy chief investment officer and director of corporate governance, Pennsylvania State Employees’ Retirement System. 

Mr. Brier? 

STATEMENT OF THOMAS F. BRIER, DEPUTY CHIEF INVESTMENT OFFICER AND DIRECTOR OF CORPORATE GOVERNANCE, PENNSYLVANIA STATE EMPLOYEES’ RETIREMENT 

SYSTEM 

Mr. BRIER. Good morning, Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee. Thank you for inviting us to appear at the committee this morning. 

Established in 1923, the Pennsylvania State Employees’ Retirement System is one of the oldest and largest pension funds in the 

United States. We have over 220,000 members, and over the past 

13 

10 years, have paid out approximately $18 billion in benefits to 

workers in Pennsylvania and retirees. 

Like Colorado PERA and other pension funds, we are long-term 

investors with significant passive investment strategies. As a result, we have been a long time proponent of good corporate governance. 

One common element in the failure of Lehman Brothers, AIG, 

Fannie Mae, and many other companies implicated in the financial 

meltdown was that the boards of directors did not hold management sufficiently accountable. They failed to control management’s 

excessive risk-taking. They did not prevent compensation plans 

from encouraging a ‘‘bet the ranch’’ mentality. 

As famed investor Warren Buffett observed in his most recent 

letter to Berkshire Hathaway shareholders, ‘‘A board of directors of 

a huge financial institution is derelict if it does not insist that its 

CEO bear full responsibility for risk control. 

‘‘If he is incapable of handling that job, he should look for other 

employment, and if he fails at it, with the government thereupon 

required to step in with funds or guarantees, the financial consequences for him and his board should be severe.’’ 

After describing the half a trillion dollars that investors lost in 

just these companies, Warren continued, ‘‘CEOs and in many cases, 

directors, have long benefitted from oversized financial carrots; 

some meaningful sticks now need to be part of their employment 

picture as well.’’ 

SERS, like many other long-term investors, believe that two fundamental corporate governance improvements could provide, in Mr. 

Buffett’s words, ‘‘meaningful sticks,’’ necessary to improve the oversight of CEOs by corporate boards, and therefore significantly reducing the likelihood of a repeat session like this. 

There are two improvements that we think do the heavy lifting 

going forward, and they are proxy access and majority voting. 

First, proxy access. Federal proxy rules have historically prohibited 

shareholders from placing names of their own director candidates 

on public company proxy cards for consideration by their shareholders. 

As a result, incumbent directors who fail in their oversight responsibilities have little reason to change their behavior because it 

is highly unlikely they can be replaced or even challenged by an 

alternate board of candidates. 

Fortunately, due to the extraordinary leadership of this subcommittee and the full Committee on Financial Services, and the 

SEC, proxy access will soon become a reality. 

As you may recall, in June of 2009, the SEC issued a thoughtful 

proposal providing for an uniform measured right for groups of significant long-term investors to place a limited number of nominees 

on the company proxy card. 

After very careful consideration of input received in response to 

two separate comment periods, the SEC appears poised now to provide a final uniform proxy access rule that we believe responds to 

the demands of long-term investors. 

Importantly, this subcommittee and the full Committee on Financial Services had the foresight to include a provision in the 

Wall Street Reform and Consumer Protection Act that reaffirms 

14 

that the SEC has the unambiguous authority to issue their final 

proxy access rule. 

We again commend the subcommittee for their leadership in pursuing this provision. We are pleased the provision is strongly supported by the Administration and is a critical element of regulatory 

reform. 

The second corporate governance improvement we believe is necessary is the requirement that all public companies adopt a majority standard for director elections. 

Currently, most companies elect directors in uncontested elections using a plurality standard, by which shareholders may vote 

for but cannot vote against a nominee. Shockingly, a derelict corporate director can still win re-election by simply receiving one vote 

under a plurality standard, a single vote. They could actually vote 

for themselves. 

As a consequence, unseating poorly performing directors is virtually impossible. The Shareholder Empowerment Act of 2009, one 

of the bills referenced in connection with this hearing, includes a 

provision that requires the Commission to direct the stock exchanges to prohibit the listing of any security of any issuer if the 

company does not adopt majority voting. We generally support that 

provision. 

The benefits of requiring all publicly listed companies to adopt a 

majority vote standard are many. It would democratize the corporate electorial process and put real voting power in the hands of 

long-term investors, like SERS, and make boards more accountable 

to shareholders. 

On behalf of SERS and the tens of thousands of employees who 

depend on us for their retirement security, we respectfully request 

your support for prompt adoption by all public companies of both 

proxy access and majority voting. 

Thank you, Mr. Chairman, for inviting me to participate in this 

hearing. I look forward to answering any questions you may have. 

[The prepared statement of Mr. Brier can be found on page 53 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Brier. 

Now, we will have Mr. Alexander M. Cutler, chairman and chief 

executive officer of Eaton Corporation. 

Mr. Cutler? 

STATEMENT OF ALEXANDER M. CUTLER, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, EATON CORPORATION, ON BEHALF OF BUSINESS ROUNDTABLE 

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

committee. Good morning. My name is Sandy Cutler, and I am 

chairman and CEO of Eaton Corporation. I am also chairman of 

the Business Roundtable Corporate Leadership Initiative. 

I have been chairman and chief executive officer of Eaton for 10 

years, and I serve on 2 other for-profit boards, as lead director on 

one of those boards, and it is from this experience that I speak to 

you this morning. 

We at the Business Roundtable support an examination of both 

corporate governance and financial regulatory reform, but believe 

that each are important enough on their own merit to deserve sepVerDate Nov 24 2008 17:01 Sep 14, 2010 Jkt 057743 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\57743.TXT TERRIE
15 

arate consideration. Combining the two in the pending legislation 

permits public anger about the financial crisis to substitute for a 

fact-based examination of our corporate governance system. 

Substantial changes have indeed occurred during the past decade 

in corporate governance. Companies have taken a number of voluntary actions; and State legislatures, the SEC, and the New York 

Stock Exchange have adopted a number of statutory and rule 

changes. 

We are pleased that the Business Roundtable has been at the 

forefront of efforts to improve corporate governance through support of many of these initiatives. 

Just this week, we are releasing our most recent list of principles 

of corporate governance. These changes have resulted in more independent boards and board committees; improved board practices; 

and the adoption of majority voting by a large number of companies. 

As you know, the change in majority voting was facilitated by 

amendments to a Delaware corporate statute and the Model Business Corporation Act, which is followed by 30 States. 

Other important changes have included the New York Stock Exchange prohibition of broker voting in uncontested director elections effective at shareholder meetings after January 1st of this 

year, and the SEC’s recent adoption of a number of disclosure enhancements that address several of the concerns in the proposed 

legislation, including those related to board leadership structure, 

risk management, and board oversight. 

I would like to focus my comments today on proxy access, as we 

view it as an ill-conceived attempt to improve corporate governance. Indeed, rather than empower shareholders, we believe it 

would deprive them of important choices and have serious potential 

adverse consequences. 

The proxy access provision of the Shareholder Empowerment Act 

would require the SEC to issue proxy access rules permitting 

shareholders owning as little as 1 percent of the company’s securities for at least 2 years to nominate director candidates in the company’s proxy materials. 

Clearly, director accountability to shareholders is extremely important, but a federally-mandated proxy access right is not the 

most effective way to achieve this goal. 

Moreover, a proxy access rule could exacerbate the short-term 

focus that is widely considered to be a contributing factor to the financial crisis. 

The process of frequent election contests could cause directors to 

focus on structure and stock price rather than invest for the creation of long-term value. In addition, proxy access would permit 

shareholder activists with very limited stock holdings in the company to pursue special interest agendas to the detriment of the majority of the shareholders. 

Even if special interest directors do not get elected, the company 

and its shareholders will have been forced to bear the costs and 

suffer the distraction of a time-consuming and expensive proxy contest. 

Finally, a federally-mandated proxy access right would preclude 

companies and their shareholders from taking advantage of the reVerDate Nov 24 2008 17:01 Sep 14, 2010 Jkt 057743 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\57743.TXT TERRIE
16 

cent State proxy access enabling statutes to adopt customized 

proxy access procedures that suit their needs. 

Today, contemporary boards of directors use a variety of tools 

and processes to see that qualified directors are presented to the 

shareholders for re-election. 

They strategically review skill matrices of current directors. They 

carefully assess forward-looking skill requirements on the board, 

such as audit committee financial experts. They see if the relevant 

knowledge is present to provide guidance, counsel, and oversight. 

They undertake vigorous evaluations of the board, its committees 

and individual directors, and they disclose to shareholders their criterion for board membership along with the qualifications and experience of nominated directors. 

It is difficult to understand how an outside process conducted 

without board involvement, as proposed under a proxy access regime, will not fall short of this thoughtful and informed process. 

Before closing, I want to mention three other issues related to 

proxy access that the proposed legislation does not address: concerns about the current shareholder communication system; the integrity of the proxy voting system; and the influence of the proxy 

advisory services. All of these have been addressed in more detail 

in my written testimony. 

We are pleased that the SEC is beginning a study of these 

issues, but they need to be resolved before a proxy access regime 

is implemented. 

In closing, let me emphasize that the Business Roundtable is 

committed to effective corporate governance practices. However, we 

must be careful not to impose one-size-fits-all solutions that undermine the ability of shareholders and their boards of directors to 

govern themselves effectively. 

We stand ready to work with this committee, and I would be 

happy to answer any questions. Thank you very much. 

[The prepared statement of Mr. Cutler can be found on page 64 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Cutler. 

Now, we will hear from our next presenter, Mr. Brandon J. Rees, 

deputy director, AFL-CIO. 

Mr. Rees? 

STATEMENT OF BRANDON J. REES, DEPUTY DIRECTOR, 

OFFICE OF INVESTMENT, AFL-CIO 

Mr. REES. Thank you, Mr. Chairman. 

Corporate governance reform is absolutely needed in response to 

the financial crisis. Mandatory corporate governance rules benefit 

all publicly traded companies by enhancing investor confidence in 

our capital markets. 

Stock market investors have just suffered the worse decade since 

the Great Depression. During the past 10 years, the S&P 500 companies’ stock prices have declined 24 percent. Needless to say, the 

retirement savings of America’s workers have been decimated. 

At the beginning of this lost decade, shareholders suffered the 

corporate accounting scandals at Enron, WorldCom, and hundreds 

of other companies. More recently, we have been battered by the 

17 

collapse of Lehman Brothers, Bear Stearns, and the resulting financial crisis. 

Corporate governance failures are the primary cause of this lost 

decade for investors. We blame boards of directors for failing to 

focus management on the long-term, for failing to prevent malfeasance by executives, and for failing to properly manage risk. 

Nowhere is the breakdown in corporate governance accountability more apparent than on the issue of executive compensation. 

CEO pay has never been higher than in the past decade. Last year, 

S&P 500 CEOs received $9.25 million on average. Executive pay is 

the mechanism by which CEOs have become captive to short-term 

market forces. 

The collapse of Bear Stearns and Lehman Brothers provides a 

dramatic example of what is wrong with executive pay. Between 

2000 and 2008, the top 5 executives at Bear Stearns pocketed $1.4 

billion in cash, bonuses, and equity sales. Lehman Brothers’ executives took home $1 billion. Shareholders got nothing. 

As is required in other countries, American companies should 

give their shareholders a say on pay. An annual vote on executive 

compensation would encourage boards to be more proactive in seeking out shareholders’ views. 

As a result, best practices in executive compensation would disseminate more quickly. Ultimately, it is the job of the board of directors to set fair executive pay packages, to prevent malfeasance, 

and to manage risk. 

We believe that boards of directors have been too complaisant in 

their duties. Existing corporate governance mechanisms simply fail 

to adequately hold boards of directors accountable. 

The election of directors is one of the fundamental rights of 

stockholders, but too often, withhold votes against director nominees are ignored. Last year, over 90 directors at 50 companies 

failed to receive majority support for their election. Every one of 

these directors was seated despite their shareholder opposition. 

Replacing plurality voting with majority vote at director elections 

is valuable. However, majority voting alone cannot adequately reform the director election process. 

Half of all publicly traded companies are incorporated in Delaware. Under Delaware’s hold over rule, incumbent directors remain 

on the board even if they are not re-elected by majority vote. 

To make director elections more meaningful, long-term shareholders need to have equal access to the proxy. Equal access to the 

proxy will set ground rules for shareholder democracy. It will limit 

the advantage of incumbents who now have unlimited access to the 

corporate treasury to finance their proxy solicitation. 

Equal access to the proxy will open up boards of directors to divergent viewpoints. Debate should be welcomed in corporate boardrooms, not feared. 

A director whose nomination depends on a backing of a long-term 

institutional investor and not his fellow directors can play that 

role. That is the goal of proxy access. 

Now that the SEC is preparing to issue a proxy access rule, the 

opponents of reform have put forward the idea of voluntary proxy 

access. According to these so-called private ordering proposals, comVerDate Nov 24 2008 17:01 Sep 14, 2010 Jkt 057743 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\57743.TXT TERRIE
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panies should be able to opt in or to opt out of equal access to the 

proxy. There are two major problems with such proposals. 

First of all, companies have stacked the deck to prevent shareholders from adopting proxy access. Nearly half of all companies in 

the Russell 3000 Index restrict the ability of shareholders to amend 

company bylaws or they have dual class stock voting. 

If proxy access is made voluntary, only those companies that already have good corporate governance will adopt proxy access. 

Those companies with entrenched boards will resist proxy access. 

Secondly, allowing companies to opt out of proxy access sets a 

dangerous precedent. Proxy access is about the Federal regulation 

of proxy solicitations, not about State corporate laws, and for the 

past 75 years, our Federal proxy solicitation regulations have been 

mandatory. 

Corporate governance reforms such as equal access to the proxy 

can be a potent tool to focus companies on sustainable value creation. For these reasons, director elections must be open to longterm investors through proxy access. 

Thank you, Mr. Chairman, for considering my views. 

[The prepared statement of Mr. Rees can be found on page 312 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Rees. 

Now, we will hear from Mr. Robert E. Smith, vice president, deputy general counsel, and assistant secretary, NiSource, on behalf of 

the Society of Corporate Secretaries and Governance Professionals. 

Mr. Smith? That is quite a title, Mr. Smith. 

STATEMENT OF ROBERT E. SMITH, VICE PRESIDENT, DEPUTY 

GENERAL COUNSEL, AND ASSISTANT CORPORATE SECRETARY, NISOURCE, INC., ON BEHALF OF THE SOCIETY OF 

CORPORATE SECRETARIES AND GOVERNANCE PROFESSIONALS 

Mr. ROBERT SMITH. Thank you, Mr. Chairman. 

As stated, my name is Bob Smith, and I am vice president, deputy general counsel, and assistant corporate secretary of NiSource. 

NiSource is an energy holding company whose subsidiaries engage in natural gas transmission, storage, and distribution, as well 

as electric generation, transmission, and distribution. 

In my position at NiSource, I am responsible for the company’s 

corporate group, which provides legal advice on general corporate 

matters, finance matters, securities matters, governance matters, 

and similar subjects. 

I also serve on the board of directors of the Society of Corporate 

Secretaries and Governance Professionals. The Society is a professional association founded in 1946 with over 3,100 members who 

serve more than 2,000 companies. 

The Society’s members are responsible for supporting the work 

of the companies’ boards of directors and their committees and the 

corporate governance and disclosure activities of the companies. 

I am here today in my capacity as a director of the Society and 

I very much appreciate the opportunity to participate in this hearing and to provide input on behalf of our diverse membership, diverse across industry and diverse across market capitalization. 

19 

The Society strongly believes in and has consistently supported 

good governance practices, which include the right of shareholders 

to have an effective vote in the election process and the ability to 

recommend persons for nominations to the board of directors. 

As potential governance legislation is contemplated, it is important that we recognize that we are currently in the midst of a corporate governance sea change. 

Over the past decade, this sea change is blatantly evident 

through the many leading practices that have trended toward 

mainstream or widely accepted adoption by public companies. 

These changes in governance practices have generally been in the 

form of enhancements to shareholder involvement, shareholder 

input, or shareholder information. 

It is important to note that these practices are empowering 

shareholders and have occurred without legislative involvement, as 

individual company shareholders have determined what is best and 

what is appropriate for their individual companies. 

Examples of this organic shareholder empowered governance evolution includes development in such practices as majority voting, 

independence of directors, policies regarding independent compensation consultants, elimination of poison pills, declassification of 

board member terms, clawbacks and incentive compensation plans, 

separation of chairman and CEO, and stock ownership guidelines 

for directors and officers. 

Adoption of governance policies addressing matters such as these 

clearly show that shareholders are having a voice in the governance of companies. 

Of equal importance is the observation that not all companies or 

shareholders have deemed it appropriate to adopt policies addressing these matters. 

This is the essence of true shareholder empowerment, the ability 

for shareholders to choose whether governance issues should be addressed and if so, how they should be addressed at their individual 

companies. 

This is in fact the great irony behind the various pieces of legislation now being proposed as they intend to empower shareholders, 

but they actually force all shareholders to adopt specific provisions 

in an identical way, whether the shareholders want it or not. 

This is why the Society hopes to ensure that the shareholder proposal process remains the vehicle for shareholder communication, 

for shareholder change, and for the promotion of shareholder 

choice, true shareholder choice, rather than forcing the hot reactionary issues of the day on all issuers and shareholders regardless 

of shareholder desire or need. 

It is also important to make sure that any legislative reaction 

should protect shareholder value through avoiding the creation of 

potential mismatches of influence by short-term investors with the 

long-term growth and value creation strategies of public companies. 

Looking at major provisions of the proposed legislation, I will 

just touch on a couple really quickly, majority voting, for instance. 

Without legislative regulatory requirements, the adoption of majority voting has been a significant trend. 

In fact, according to a CalPERS release last month, as of September 2009, approximately 71 percent of S&P 500 companies and 

20 

50 percent of Russell 1000 companies had already adopted some 

form of policy for director resignations or majority vote. 

This is a prime example of companies hearing shareholders’ concerns and addressing those concerns utilizing the current proxy 

proposal and communication structures. 

To legislate majority voting when shareholders have in fact been 

empowered to address their concerns in this area is both unnecessary and would disempower the shareholders of companies that 

have determined that majority voting is not an issue they desire 

to address at their companies, by in fact voting against majority 

voting proposals. 

I would welcome the opportunity to discuss other issues that are 

in the legislation, but in conclusion, true shareholder empowerment 

allows all shareholders to choose what is best for their respective 

companies, not forcing shareholders to accept rigid schemes regardless of whether they want them or not. 

Legislation should be thoughtfully enacted only where there is 

clear consensus and empirical evidence that change is needed and 

that such change would support the long-term interests of all 

shareholders. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Robert Smith can be found on 

page 339 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Smith. 

Finally, we will hear from Mr. James Allen, head of capital markets policy, CFA Institute. 

Mr. Allen? 

STATEMENT OF JAMES ALLEN, HEAD OF CAPITAL MARKETS 

POLICY, CFA INSTITUTE 

Mr. ALLEN. Good morning. I want to thank Chairman Kanjorski, 

Ranking Member Garrett, and all the members of the subcommittee for asking us to come speak to you today. 

My name is Jim Allen, and I am head of capital markets policy 

at CFA Institute. For those of you who are unfamiliar with the 

CFA Institute, we are a nonprofit membership organization with 

more than 100,000 investment analysts, advisors, portfolio managers and other investment professionals throughout the world. 

Our members are generally involved, therefore, in investing the 

savings and retirement funds from millions of Americans and others worldwide. 

We are probably best known for administering the 3 year testing 

program that leads to the awarding of the chartered financial analyst or CFA credential. More than 5 years ago, as part of our education program, we incorporated corporate governance factors into 

those global exams, and more than 100,000 candidates throughout 

the world have been tested on these issues ever since. 

At the CFA Institute, we have a fundamental belief that what is 

good for investors is good for financial markets in general. This 

view is inherent in our code of ethics and standards of professional 

conduct that applies to all of our members wherever they reside in 

the world, and it has also informed the positions we have advocated to regulators and legislators globally over the years. 

21 

We have long supported strong corporate governance structures 

under the belief founded in research that well-governed companies 

perform better over the long-term than those that are not well governed. 

While we want to ensure shareowners have an effective voice, we 

also do not want to interfere unreasonably into corporate boards. 

This requires a finely tuned balance of interests and reasonable restraints on both investors and corporate issuers. 

As noted in my written testimony, we believe that corporate governance failures on the part of financial institutions play an important but by no means exclusive role in the financial market paralysis that began in August of 2007. 

Senior executives, board members, and regulators alike failed to 

appreciate the potential risks coming from large concentrations of 

high-risk loans funded through highly leveraged structures and unreliable wholesale funds. 

I would like to note that many of the proposals made in these 

three bills deal with issues which we have long supported as needed to prevent these kinds of failures. 

Two such provisions are legislative efforts for majority voting and 

greater proxy access for shareowners. We believe these two changes 

are the most critical and most needed to ensure that shareowners 

have the ability to hold their board members accountable. 

Likewise, we support say on pay as a means of increasing board 

accountability. Nearly 81 percent of our members responding to an 

October survey said they support a non-binding vote on executive 

pay. This view is due in large part to how it has worked where it 

has been adopted. 

Indeed, our members in the U.K. and Australia say such provisions increased board attention to investor perspectives and helped 

reduce the rate of increase in executive pay by half in the first year 

after adoption by U.K. companies. 

We also believe that better and more relevant disclosures about 

executive pay will increase board accountability and have supported regulatory efforts in this regard. 

Looking ahead, we are working with the Blue Ribbon Panel to 

develop a template to guide companies as they write their compensation discussions and analyses in the future. 

Legislation to mandate chair independence, on the other hand, is 

something we do not support, as we are concerned that it may 

trade the knowledge and expertise of corporate insiders for a functional independent figure head. Rather, such matters are best left 

to boards and shareowners to decide. 

When a CEO is also chair, we believe that independent board 

members should have the opportunity to appoint a lead director to 

chair meetings of independent directors and address issues involving potential conflicts with management. 

Finally, we are uncomfortable with proposals to have the SEC 

certify every member of the board for each of the thousands of companies trading publicly. Such a monumental effort would divert 

valuable SEC resources from the Commission’s existing mandate 

and could have undesirable effects on board membership. 

Mr. Chairman, I ask consent that in the record, these documents 

relating to items on corporate governance that we have published 

22 

over the years be allowed to be entered into the record, and we also 

want to amend our written proposal to include the data from our 

member survey. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. ALLEN. I thank you for your time, and I am willing to answer any questions that you may have. 

[The prepared statement of Mr. Allen can be found on page 49 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Allen. Thanks 

to the entire panel. That was a lengthy panel, but certainly insightful. 

As usual, we are going to pick on the minority. Mr. Cutler, I am 

looking at you. 

[laughter] 

Chairman KANJORSKI. No. I am impressed. First of all, let me 

tell you, I have always been a proponent of the idea of self-regulation, and hopeful that any type of organization could rely on its 

own internal values to guide its actions. 

I have seen, however, fundamental changes in the corporate 

structure and the ownership of the corporate structure, and by 

analogy, I would draw to the union movement. I am sure, as a capitalist, that gets your attention. 

As you recall, about 3 or 4 decades ago, there was at least across 

the land a cry that unions had lost their democratic processes, and 

therefore, there was a denial of the democratic process to the average union member, and this Congress, after a hesitancy, and a 

rightful hesitancy, finally did enact the Landrum-Griffin Act. 

The Landrum-Griffin Act could be criticized for some things, but 

clearly, it imposed upon the union movement democratic processes, 

that the members could be guaranteed they would have a right to 

meet at conventions. They would have a right to free speech. They 

would have a right to not be put upon for their actions or thoughts 

in regard to their union activities. 

Now, we have come to corporate activity. Up until now, we granted the presumption that corporations, shareholders, owners, directors, and management could be relied upon to act responsibly, but 

I would call to your attention two things that have changed significantly. 

Throughout the testimony, if you listened to the entire panel, 

they all talked about the shareholders. In so many instances, there 

are not any more single shareholders. These are conglomerations 

of agencies that represent pension funds of individual investors 

that are lumped together. 

The managers of these funds really are interested in the return 

on investment and are not particularly disturbed by democratic or 

non-democratic activities of American corporations. They could 

really care less if the return is sufficient to pay the pension or 

whatever else is necessary in that fund. 

There was a time in the 1929 crash that we could say look, it 

is your money, you can put it anywhere you want to, and if you 

want democratic processes, you can vote accordingly or take your 

money and get out of the corporation. 

Today, if I am part of a pension fund, as in the House of Representatives, I think it is Fund C, that has the common stock fund, 

23 

I cannot vote my common stock. I do not even know who is voting 

it and I do not know what corporations they are putting it into. 

The only thing I get to be told is once a year whether or not I 

have made an increase in value or a loss in value. Usually, I do 

not pay a lot of attention to it. Of course, I am not in that fund 

because of my role here at the committee. 

You do give it attention at the end of the year if you get a 30 

percent loss and suddenly you are asking the pertinent question, 

why did that happen? You may find out, as one witness described 

the Moody operation, when they made a presentation to the board 

of directors, they were inconsequential in terms of understanding 

what their role was, and just absent of all the suggested thought 

processes that you expect from responsible board members. 

If you had listened to the testimony yesterday of some of the 

chief executive officers and others and members of the board of 

Lehman Brothers, it was a little bit startling. 

We had a CEO who was paid a poor salary given today’s monies. I think in 2007, he only received $72 million. You could not expect 

him to pay a great deal of attention to his job or attention to 

whether he was working for the benefit of the shareholders or not. 

He said he just did not know any of these things were happening. He was not aware they were doing repos, 105 repos. He 

was not aware of the fact that so many things were being done. 

Now, what I have concluded is really we are at the LandrumGriffin Act, if you will, with corporations. Are we going to impose 

here through government new standards, and granted, probably 

uniform standards as opposed to particularized rights of decision, 

how to run one single corporation over another? 

Are we going to do that or are we going to ignore the fact that 

there are a large number of American people who are investors and 

owners directly or indirectly in American corporations who do not 

feel they are getting adequately represented, where huge bonuses 

can be paid of billions of dollars, and no shareholder payments or 

dividends are paid out. 

We are not casting aspersions on your activities as a CEO. I am 

sure you are above and beyond any of those criticisms. 

Obviously, there is a percentage of corporate leadership in America that has failed. This committee, it seems to me, is called upon 

to decide where are we going. 

I have eaten up all 5 minutes. I am not going to get much of a 

chance to get an answer from you. I will try to pick it up in my 

next set of questions. I want to hear from my ranking member 

from New Jersey. I am sure he has the answer to some of my questions. 

[laughter] 

Mr. GARRETT. Thank you. I can give you some answers. I want 

to thank the panel. I do appreciate the comments and the testimony here today. I share some of the concerns. 

Mr. Smith, you laid them out, and the others did, too, but I think 

you laid out some of the concerns we have about some of these 

things. 

Let me just throw out some things. One of the takeaways I get 

from this and the impression I get from a number of the panelists 

was that we are in this financial crisis situation and we can look 

24 

to corporate governance as being a root cause of it. I, as you heard 

in my opening testimony, have a question on that. 

Let me go with this simple question. To the extent that business, 

Wall Street, was a cause of the problem, and of course, there is debate as to the extent of their cause and regulators being the other 

part of it, but to the extent that Wall Street was a cause of the 

problem, I note that the legislation that we are looking at would 

go much further than regulating with corporate governance Wall 

Street. 

Ninety-eight or 99 percent of public companies are non-financial 

institutions. Answer this question, if we are trying to attack the 

problem, which is Wall Street, why are we also addressing the 

other 98 percent of the public companies with this legislation? Was 

I clear on that? 

Mr. CUTLER. Could I make an attempt at that, and also the previous comments, and try to combine them? 

Mr. GARRETT. No, go with mine. 

Mr. CUTLER. These arguments, many of these arguments on the 

issues of corporate governance date back some 20 years. They have 

been around for quite a long time period. 

I think what is very important to keep in mind at this point is 

we have come through a terrible financial crisis but there has been 

no evidence in any country that you can regulate the economic 

cycle. 

I think we have to recognize there are cycles in economies. They 

are aggravated by different crises that have occurred around the 

world over time, but the heart of those is not corporate governance. 

It is the economic cycle. 

There are abuses that occur around the world at different times, 

but I would say the solution that we are trying to solve for here 

is we have two fairly distinct events: one, an enormous issue of 

international financial regulatory reform and it is not just in the 

United States; and two, a number of the corporate governance proposals that are being proposed did not stop, although they are in 

place in other countries, they did not stop the economic cycle and 

the financial regulatory reform from occurring in those countries. 

Mr. GARRETT. Thank you. I only have 5 minutes. 

Mr. Rees? 

Mr. REES. Yes, thank you. I would point out that it is not just 

Wall Street. For the past 10 years, the stock market, as measured 

by the S&P 500, has performed negatively. Investors lost money 

over 10 years. That is money that our pension funds depend on in 

order to pay for the retirement security of America’s working families. 

Corporate governance was the root cause not just of the financial 

crisis, but the corporate accounting scandals, the stock option back 

dating scandals, a whole bevy of scandals over the past decade. 

We have to remember that corporate governance failures drove 

those scandals. 

Mr. GARRETT. If you are telling me that the funds you are invested with have done poorly over the last 10 years, then I would 

have a question on your investment advice with regard to those 

funds. Up until the crisis that we have had just now, I think the 

markets have done amazingly well, if you look over time. 

25 

The question that I have also is, do you find yourselves potentially in a conflicted situation here? I do agree with you on your 

point where you say we need to take a long-term look at these 

things. 

You are in a conflicted role when you are looking for the longterm interests of the stockholders in these things versus the shortterm interests of your membership. Is that not correct? 

Mr. REES. Absolutely not. Our members depend on companies to 

invest for the long-term to create jobs, and I am shocked to hear 

that other members of this panel think that shareholders who own 

one percent of the stock of companies should not be able to nominate their own directors. 

Mr. GARRETT. That was not my question, but thanks. 

The question is, if you are out there trying to get jobs for your 

employees today, that may at certain times, I would think, run at 

cross purposes with the idea of increase in shareholder value over 

the long term. 

What about where those jobs are located? That thought just pops 

into my head, when it comes to the issue of creating jobs, is it 

maybe better for shareholder value in certain circumstances, nothing that I encourage by any means, but in certain circumstances, 

maybe it would be better for those jobs not to be in the neighborhood of where your particular union is in your State, for State 

funds and what have you, or out of the country. 

What happens then when it is an issue of local jobs versus longterm investment? Which side do you come down on, long-term 

shareholder value or the jobs for your union members? 

Mr. REES. We come down on the side of long-term shareholders, 

because that is in the best interest of employees of those companies. 

Mr. GARRETT. Even if those employees may no longer be here in 

the area of my State? 

Mr. REES. We have a different view of how companies should be 

managed. We believe that it should be based on the long-term interests of the company and its stakeholders, including shareholders, and we are not getting that from the current system. We 

are not getting that. 

We are getting ‘‘short-termism ’’, driven by excessive CEO pay 

and a focus on the short-term, not the long-term. That is why 

shareholders need to have a greater voice in corporate governance. 

Mr. GARRETT. Do the membership of the unions have the same 

ability to have that interest and governance of the unions as far 

as executive pay and the other things we are looking for here in 

this legislation? Do they have that say? 

Mr. REES. Yes. Our officers are directly elected by the membership of the organizations, unlike corporations where the CEOs are 

appointed by a board. 

Mr. GARRETT. Is their compensation set by membership? 

Mr. REES. It is fully disclosed. 

Mr. GARRETT. I know. Does the membership get to vote on compensation? I do not know. 

Mr. REES. Yes, they do. 

Mr. GARRETT. In all instances, they vote on the compensation? 

26 

Mr. REES. They vote on the compensation policies through the 

democratic processes that the unions have established and are required to have under the Landrum-Griffin Act. 

Mr. GARRETT. Thanks. 

Chairman KANJORSKI. The gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. I appreciate my friend 

from California letting me jump ahead. I have to get out of here. 

Mr. Cutler, my questions are simpler. In your company—I am 

not sure, what does your company do, Eaton? 

Mr. CUTLER. We are a diversified manufacturer of electrical 

equipment, aerospace equipment, hydraulic equipment, and automotive and truck equipment. 

Mr. PERLMUTTER. How does your company go about choosing a 

member of its board? 

Mr. CUTLER. Our board of directors’ nominating committee and 

governance committee does that work. As I mentioned before, they 

put together skill matrices in terms of what the current skills on 

the board are. They look at the strategic plan and the issues facing 

the company as they see it over the next couple of years, and identify the skills that they then want to seek. 

They use an outside consultant to do the initial interviewing, and 

then they make the nomination and give it to the shareholders for 

election. 

Mr. PERLMUTTER. Do you or does your company require any kind 

of knowledge on the part of your director, either before he is nominated or once he or she becomes a member on corporate governance? Is there any kind of education class? 

How does your company go about making sure you have the best 

directors, some of whom may have to stand up to you on a decision 

or two that you want to make? 

I think in my experience, sometimes boards really play a very 

docile role. 

Mr. CUTLER. My experience in serving on three boards currently, 

and acting as the lead director on one of them, is that is a view 

which is quite dated. A mass of changes have occurred in this area. 

I think if you simply look at what has happened to the tenure 

of CEOs, and BRT is one subset, it is about 4 years right now. This 

idea of entrenched management is a backward looking issue. 

If you look at board turnover, you would find last year, and I believe the number was over 60 percent, of our boards had at least 

one member turnover. I think it was just over 50, I would have to 

confirm that number, for two members. 

You are seeing turnover occurring on the boards. I can tell you 

from my own experience, my own directors at our company have 

no problem in not only standing up but taking very different views 

than those of management. It is a very healthy exchange. 

Mr. PERLMUTTER. Is there some kind of continuing education 

component that you have with your directors? 

Mr. CUTLER. Yes, our policy is that our board does have a continuing education requirement through accredited education 

courses outside of the company. We also twice a year conduct internal training on specific functional issues, and to come back to your 

earlier question, part of the criterion that our board examines 

27 

when they look at a man or a woman as a potential candidate as 

a nominee for our board is not only their breadth of business experience, but have they served on boards, do they have governance 

experience, have they been around these issues? 

Mr. PERLMUTTER. Thanks. I would like to ask the two Mr. 

Smith’s the same question: Mr. Smith of NiSource; and then my 

friend, Mr. Greg Smith, from Colorado. 

Mr. ROBERT SMITH. Thank you. I will speak on behalf of the Society members. The Society has noticed and we have seen as Mr. 

Cutler pointed out a big sea change in the governance arena, and 

the docile board connotation really does appear to be a thing of the 

past for most companies. 

There could be some examples of outliers in that area, but there 

is a much more active board. This is seen through a move to independence, if you look at the number of independent directors on 

public companies, that number has increased dramatically over the 

last 10 years. 

It comes as a result also even recently as a result of new disclosures that are being required. There are new disclosures that are 

being required by the SEC on executive compensation analysis. Is 

there excessive risk in the executive compensation plans of the 

company. It comes in the disclosure on risk management. 

Mr. PERLMUTTER. Let me stop you for one second. Do you have 

a corporate governance kind of education policy or anything like 

that at your company? 

Mr. ROBERT SMITH. At our company, we do encourage the board 

members to obtain outside education. 

Mr. PERLMUTTER. Greg Smith, please. 

Mr. GREGORY SMITH. Thank you. We are always excited to hear 

when there are corporations, and we certainly acknowledge there 

are many corporations in corporate America who have adopted 

good policies and are taking up good practices. 

Unfortunately, they are not all that way. We think what they 

have demonstrated, these ones that do have good accountability, 

that have good corporate governance, is that it works well, and in 

fact, it does not make the sky fall. It does not make management 

fail in its role. It does not tie the hands of corporate America. 

In fact, it empowers both the corporations and their shareholders 

to advance toward greater shareholder value. 

In our organization, we certainly have education for our trustees 

who are in a similar role, and in our management, we certainly are 

focused on the constant education toward better corporate governance and better responsibility and accountability to our stakeholders throughout the State of Colorado. 

Mr. PERLMUTTER. Thank you. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Perlmutter. Now the gentleman from Delaware, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. I am concerned that the 

proposals that we are discussing here today and the legislation we 

are discussing today may exacerbate the problem of short-termism, 

and not mitigate it as all of you have indicated you would like to 

see happening. 

28 

Just some statistics we have picked up: annual stock trading 

turnover on the New York Stock Exchange was 36 percent in 1980; 

88 percent in 2000; 118 percent in 2006; and 123 percent in 2007. 

This data, of course, suggests that trading speculating has replaced investing as the principal goal of stockholders or in other 

words, short-termism. 

Since some of your operations own so many shares, your pension 

funds might be responsible at least in part for the staggering increase in turnover. For those who are involved in that, Mr. Greg 

Smith, Mr. Brier, and Mr. Rees, I would assume, do you know the 

average turnover of your investments? if you do not have the data 

available, I do not expect you necessarily would here, but could you 

supply that to us in writing after this hearing? 

Do you have any comments on that, Mr. Rees? 

Mr. REES. Yes. I would be happy to get you that information. I 

can say that union-sponsored pension plans tend toward long-term 

strategies and are passive Index investors. 

We agree that there is a short-termism problem on Wall Street 

and in the stock exchanges. We joined with the Business Roundtable to sign the Aspen Institute Principles for long-termism, to encourage long-term investors. 

I would note that proxy access as currently contemplated by the 

SEC requires that shareholders to nominate directors must have 

held their shares for at least 1 year, and we have encouraged the 

SEC to consider a 2 year holding requirement. 

Mr. CASTLE. Let me go to the others, so I can ask some other 

questions, if I may. Mr. Brier, do you have a response to that? 

Mr. BRIER. We would be delighted to supply that information for 

you also. We do get a large proportion of our exposure through the 

Index products, so we are permanent owners. We have our active 

management as well. We will be delighted to supply that. 

We are also cognizant of the fact that short-term trading is a 

problem. We are looking to the SEC when they address this issue, 

and they had two open comment periods— 

Mr. CASTLE. You are saying the problem is not something you 

have helped create; is that correct? 

Mr. BRIER. Pardon me? 

Mr. CASTLE. The problem is not something that you, your operation, has helped create? 

Mr. BRIER. I would supply the information on trading, but we 

have a tranche of permanent capital that we have in Index funds. 

We cannot really sell those shares. We have a very active corporate 

governance and proxy voting policies and we publish that on the 

Web and we try to be best practices as fiduciaries. Because of that 

permanent tranche, we are long-term holders. 

Mr. CASTLE. Okay. Mr. Greg Smith? 

Mr. GREGORY SMITH. I will be happy to provide that information. 

I also am a co-chair on the Council of Institutional Investors, one 

of the largest accumulations of public pension plans, corporate pension plans, Taft-Hartley’s in the world. 

Based on our examination of our membership, I would be extremely surprised if you found that pension plans are the source 

of short-termism. 

Mr. CASTLE. You will try to get me the information? 

29 

Mr. GREGORY SMITH. Absolutely. 

Mr. CASTLE. That would be great, if you could. 

Let me ask Commissioner Irwin a question. For 150 years, we 

have had a State corporate law system that has allowed directors 

and shareholders to continually change the organic governance system for corporations. 

Over the past several years, we have seen three-quarters of the 

S&P 500 companies adopt majority voting, ending staggered boards 

in a large number, separating CEO and chairman roles, all without 

government mandates. 

If reforms are already happening at the organic level, why should 

we want to marginalize directors and shareholders and empower 

Washington bureaucrats? 

The decade has seen the entrance of government into corporate 

governance and the corresponding fall of public companies in the 

United States and a rise in public companies around the rest of the 

world. 

Are we legislating away our economic advantages to score shortterm political gains? You are, of course, involved at the State level. 

I would be interested in your comments on that. 

Mr. IRWIN. Certainly, Congressman Castle, it is a difficult question. I am not saying that—I believe that corporate governance 

issues were the cause of the crash and the melt down. 

Clearly, some of the things that we are talking about will instill 

a much greater sense of security and trust that will bring people 

back, the retail investor on Main Street back, to the capital markets. 

Mr. CASTLE. My question is, is this not happening anyway, so 

why do we need to do this as a Federal legislative mandate? 

Mr. IRWIN. One reason, we have national exchanges, and you 

have heard from some members of the panel that they invest 

across an Index, so everybody who is listed on an exchange is going 

to have investment of substantial assets from people investing 

without any control by them individually, but by their pension 

funds. 

We ought to have a minimum level of expectations as to disclosure, as to such things as executive pay and other things, so that 

there is that kind of integrity and trust that will cause those investors to return. 

Mr. CASTLE. Unfortunately, my time is up. I yield back. 

Mr. IRWIN. Obviously, we are the States. We do not really advocate preemption. We believe that whatever the rule is, we have to 

ensure that the States have the right to enforce the rule, even if 

it is a Federal rule. 

Mr. CASTLE. Thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. Now, 

we will hear from the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. I would also like to respond to the gentleman from 

Delaware. We have just had this great catastrophe, and in the 

wake of that, everybody has gotten religion. Everybody has reform 

and board members are going to classes. 

If we are lucky enough to go 10 years without a catastrophic crisis and scandal, all this will end. People will return to their old 

ways. That is why I think we have to institutionalize the lessons 

30 

of the last 2 years, rather than expect that this wave of caution is 

going to persist. 

We have seen this after every bubble, everybody is really cautious a year or two after the bubble explodes. 

State law has traditionally governed such issues as how long a 

term can a director have, do you have staggered terms, do you have 

cumulative voting, do you mandate cumulative voting? 

What we have seen for the most part, and there are some exceptions to this, is a race to the bottom. Every State says ah, there 

may be franchise fees for us if we could just get those corporations 

to incorporate here, and then when they go bankrupt, we get to do 

the bankruptcy work, too. 

The question is, should we at the Federal level establish a floor 

of minimum rights for minority shareholders that have to apply to 

all publicly held companies. 

One of these issues is cumulative voting, a system where even 

if there is a group of shareholders that has 51 percent of the 

shares, they do not necessarily get 100 percent of the board seats. 

If there is a group that has 10 or 20 percent of the shares, they 

get a board seat. 

Mr. Rees, should we as a matter of Federal law compel cumulative voting so that a minority of shareholders, not a tiny minority 

but a 10 or 20 percent minority, can get themselves at least one 

seat on the board? 

Mr. REES. The Federal Government, since the passage of the 

1934 Securities and Exchange Act, has set and regulated the proxy 

solicitation rules, and has clear authority to do that, and I believe 

can do things like proxy access through that authority. 

Your question regarding cumulative voting, cumulative voting is 

another means to empower shareholders to have board representation. I think it is something that is worthy of consideration. I would 

think it would need to be done through stock exchange listing 

standards because these are national exchanges. 

At this point, I think proxy access is the way that the Federal 

Government should set the ground rules for proxy solicitations. 

Mr. SHERMAN. I think there is a tendency for all of us to just buy 

into the traditional division between State and Federal and that is 

the Federal Government controls the proxy statement, the States 

control the corporations code. 

I am not sure that has worked all that well, certainly not over 

the last 2 years. It is the long-established tradition. 

Mr. Rees, how would we see corporation behavior change if we 

did have the kinds of proxy access rules that you are advocating? 

Mr. REES. I strongly believe that just one independent thinker on 

a board of directors can have a profound effect on how well that 

board governs the corporation. I believe what is important is not 

the nominal independence of directors or the nominating committees that select those directors, but it is the independence and spirit and the process. 

The process that proxy access would provide is for a director to 

be nominated, not dependent on the goodwill of his fellow directors, 

but by the backing of a large institutional investor. I believe that 

is a very healthy process that needs to be implemented. 

31 

Mr. SHERMAN. I think you just made the case for cumulative voting since you set forth the advantage of having a 10 or 20 percent 

group of shareholders able to elect that one independent director. 

Mr. Irwin, I see you are the securities commissioner. I do not 

know if you are the corporations commissioner. How long a term 

of office can a director have if his corporation is clever enough to 

incorporate in the most lenient State? Any idea? 

Mr. IRWIN. I am not the corporations director. I apologize. I cannot answer that question. 

Mr. SHERMAN. I have seen 3 years, I have not seen longer. I have 

seen 3 years with staggered terms. That is usually thought to be 

a defense against minority shareholders, that and the absence of 

cumulative voting. 

Mr. Chairman, I see my time has expired. I hope we set minimum national standards for empowering minority shareholders. I 

yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Sherman. We 

will now hear from the gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. Before I begin my 

questions, I would ask unanimous consent that testimony from the 

Center On Executive Compensation prepared for this hearing be 

entered into the record. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I think it was you, Mr. Brier, or several of you who used the 

phrase ‘‘excessive risk-taking’’ in describing investment strategies 

or business strategies of certain failed firms. That was you? Can 

you define ‘‘excessive risk-taking’’ versus risk-taking? 

Mr. BRIER. I think American capitalism as a brand took a massive hit when the global financial system melted down and Lehman’s demise. I think that is a case study of the entire investment 

banking industry failing to recognize the counterparty risk that 

was within the system. 

I think it is endemic to the entire financial services industry. 

Mr. HENSARLING. What is the difference between risk-taking and 

excessive risk-taking? 

Mr. BRIER. I would say an excessive risk is one that brings it to 

bankruptcy. I think it is clear that an excessive risk brought several— 

Mr. HENSARLING. Is there a company that enters into Chapter 11 

today that engaged in excessive risk-taking? 

Mr. BRIER. I would say if they technically defaulted on their obligations, they failed to manage risk properly. There are market 

forces as well. 

Mr. HENSARLING. I have seen statistics from either SBA or NFIB 

that approximately 80 percent of all small businesses fail within 3 

years. Does that mean they engaged in excessive risk-taking because they failed? 

Mr. BRIER. I think there are market forces in place. I think the 

concern here is the misalignment of executive compensation and 

risk-taking within the financial industry and other parts of the insurance industry. 

32 

I think there is a failure to recognize. AIG is a case study on 

this. They had an unit based in London because there was no oversight that was literally— 

Mr. HENSARLING. Let’s talk about AIG for a moment here and 

some of these other firms. Again, the problem I am having here is 

trying to figure out—I am unacquainted with having a rate of return without having some risk attendant to it. It is when do we 

cross into that red area that says excessive risk-taking. 

To some extent, I am concerned are we as policymakers on the 

road turning over this definition of ‘‘excessive risk-taking’’ ultimately to the Federal Government. Is that the road we are on? 

If so, was it excessive risk-taking by Members of Congress and 

Federal regulators, again, to set up Government-Sponsored Enterprises to essentially create a monopoly in the secondary housing 

market, and then give them ever increasing affordable housing initiatives that have now cost taxpayers $130 billion, and it continues 

to rise. 

Was it excessive risk-taking to have Federal bank regulators tell 

banks that they could concentrate their statutory capital in Fannie 

Mae and Freddie Mac paper, that they thought it was riskless and 

it turned out to be the most risky asset they had. 

The point I am making is I am not really sure there is a monopoly of wisdom here on exactly what is excessive risk-taking. 

Let’s talk about executive compensation. It seems to be Wall 

Street firms failed. Executives made obscene compensation packages, therefore, we must regulate compensation packages. 

There are a lot of obscene compensation packages out there. 

Again, I have an open mind, but I am looking for the evidence that 

of the Wall Street firms that did not fail, where is the distinction 

in the compensation packages? 

I have seen a study submitted that came out of Ohio State University that says, ‘‘When we look at the subset of the 54 banks that 

received TARP funding in our dataset, we find there is no statistically significant difference in the relation between dollar equity 

incentives and returns in the sub-samples of TARP and non-TARP 

recipients.’’ 

I have seen a paper from the American Enterprise Institute: ‘‘If 

bankers were being lured by their bank’s compensation systems 

and acquiring risky but lucrative assets, they should never have 

bought AAA bonds, which they did.’’ 

I have a study coming out of George Mason University comparing 

the compensation of banks determined healthy enough to repay 

their TARP funds to compensation of banks likely to need additional injections of capital that reveals little difference in their executive compensation approaches. 

At least the academic studies I have seen do not make the case 

for the nexus, and even if it did, we have again legislation before 

us to impact every single public company in America, for which I 

do not quite understand the rationale. 

One quick last question for you, Mr. Rees, and your exchange 

with Mr. Garrett. Is there a Federal mandate that forces rank-andfile members to vote on the compensation of your union executives? 

Mr. REES. There is not a say on pay mandate for union members 

to vote on executive compensation. 

33 

Mr. HENSARLING. Thank you. 

Mr. REES. That being said, union executive compensation is not 

what helped cause the financial crisis and it is not what has caused 

10 years of stock market underperformance that has damaged 

workers’ retirement savings. 

Mr. HENSARLING. The executive compensation at American Airlines, Dean Foods, and other large employers in Dallas, Texas did. 

Thank you. 

Chairman KANJORSKI. The gentleman’s time has expired. Mr. 

Ellison, since you were unable to make your opening remarks, we 

will attach an additional 3 minutes to your 5 minutes. Go ahead, 

sir. 

Mr. ELLISON. Thank you, Mr. Chairman, for holding this very 

important hearing. I really appreciate it. 

Here is my statement which I will also submit. Chairman Kanjorski, Ranking Member Garrett, and members of the Financial 

Services Committee, thank you for holding this important hearing 

on corporate governance. 

Clearly, new financial regulations should focus on enhanced consumer protection, identification of systemic risks, and enforcement 

of rules by aggressive regulators, but we are here today to discuss 

another crucial element to our approach, corporate structural relationships among shareholders, officers, and directors that generate 

outcomes in areas such as profitability, risk creation, and compensation. 

Corporate governance changes seek to beneficially alter the nature of the corporate behavior and therefore address potential 

causes of economic injustice at a root level. 

The bill I introduced, H.R. 3272, makes several proposals designed to strengthen the rights of shareholders and mitigate corporate risks. 

As a preliminary matter, I would also like to emphasize that jurisdictionally, the bill also affects companies that issue securities 

subject to Federal regulation of the Securities and Exchange Act of 

1934. 

The first element of the bill is the requirement that the chairman 

of the board be independent and not serve as an executive officer. 

The goal with this provision is to reinstate the traditional divide 

between directors and officers, with the hope that the divide will 

promote increased board oversight and scrutiny of decisions of officers. 

As we are all aware, many companies in recent years have fused 

the director and officer relationship, especially through the combined title of chairman of the board and chief executive officer. Separation of the chairman of the board from officers should promote 

independence. 

Later on, I will ask members of the panel to offer their views on 

this topic. 

The bill provides for the establishment of an independent risk 

management committee to oversee risk management policies and 

an independent compensation committee to oversee and review 

compensation practices. 

Related to risk management, the bill also creates a position of 

risk officer to establish, evaluate, and enforce risk management 

34 

policies. I believe that a risk management committee and a compensation committee are crucial first steps that will force a company to approach these matters with the care, diligence, and scrutiny that they deserve. 

The hope is that companies will realize that risks within the 

company have the potential when aggregated with other risks from 

other companies to create broad-based risks that can further impact the company itself. 

Companies at the front line of business activities must be more 

vigilant about risks. 

With regard to compensation, my hope is that compensation committees will think about compensation practices throughout an entire firm and not just for upper level executives. The simple fact 

that we speak about compensation in terms of executive compensation and not compensation for everyone else probably suggests that 

we have a serious problem. 

As we are all acutely aware, upper level executives are paid at 

levels or orders of magnitude higher than average employees and 

the trend has become more asymmetrical over time. 

While the government is not in the business of setting wages, a 

legal requirement such as a compensation committee should inject 

additional scrutiny into a review of compensation. 

Additionally, in terms of compensation, the bill requires a nonbinding shareholder vote to approve executive compensation when 

proxy solicitation rules require compensation disclosure. 

This is simply one of the many proposals currently on the table 

related to shareholder review of compensation. 

Shareholders, as the owners of companies, should have the right 

to ensure that their ownership stake is used to pay wages that promote the profitability of the company. 

Executives should not be able to drive companies into the ground 

and walk away with millions. The shareholders, if given the opportunity to review compensation, would not allow this practice to continue. 

Finally, H.R. 3272 provides that the SEC will study whether it 

should certify members of the board before they are able to join. 

Because some may view this as a drastic step, I would emphasize 

that this bill simply asks the SEC to conduct a study to determine 

the feasibility of such an approach. 

Thank you again, Mr. Chairman. Mr. Chairman, if I have any 

time left for a few questions, my first question is, I think certain 

members of our panel, I am not sure which ones, have recognized 

that there is a trend of separating the CEO from the chairperson 

of the board. 

If you regard this trend as actually happening, why do you account for it and do you think it simply should be the policy for publicly traded companies? 

Mr. ROBERT SMITH. Thank you. I believe in my opening remarks 

I did mention there is an observable trend currently in our membership towards the separation of CEO and chairman. 

Having said that, and why that is occurring, I think it is occurring for the appropriate reasons, because as shareholders look at 

the individual policies and individual practices of their companies, 

35 

they are determining a need at that company for a separation of 

the chairman and CEO. 

It comes through the proposal process. There is a dialogue that 

happens with the company. Then in the cases where a majority of 

the shareholders would then desire that, it is passed and implemented. 

Having said that, we feel strongly that it should not be legislated 

because that disempowers the shareholders to have that dialogue 

and it disempowers the shareholders to have the choice as to 

whether or not that is the appropriate thing. 

As for the example in Mr. Garrett’s opening remarks regarding 

Bill Gates, under the current Peters’ bill legislation, he would not 

be able to serve as the chairman of Microsoft, and it is incomprehensible how that would be in the shareholders’ best interest. 

There are examples like that, new companies who are IPO’ing 

and coming out, and they have a CEO with a rich history of knowledge of the company and the industry, and to bring in someone 

with zero tenure and to have them then be the figurehead and the 

chairman of the company, it does not always make sense. Sometimes, it does. Sometimes, it does not. That is why we would recommend it not being legislated, but being a viable option. 

Mr. ELLISON. Any other views on this topic? 

Mr. CUTLER. Yes, I would just add that we agree with that position and really feel the SEC required disclosure on leadership 

structure last year is very appropriate and I think as you look at 

the proxies coming out in the 2010 season, you are seeing companies—the board—specifying what their leadership structure is and 

why they chose that structure. We think that is the appropriate 

level of disclosure on an annual basis. 

Mr. GREGORY SMITH. It is disturbing to us in Colorado in our 

pension fund that for some reason, the successes that have occurred across the country in reforming corporate America to adopt 

appropriate governance standards has now become the shield for 

corporations who have not adopted these standards and have not 

taken these progressive steps to say, oh, look, it is happening already without us being told and forced to do it, and they are being 

allowed to hide behind the good members of our corporate community. 

We would suggest that in fact what has happened is the corporations who recognize and acknowledge their obligations to shareholders have taken the appropriate steps and for that, we are 

thankful, but to suggest that therefore shields those who have not 

taken those actions from needing to or relieves the need for Federal 

legislation to impose appropriate tools for shareholders to enforce 

these principles, these core principles, it is just a travesty, and it 

needs to be looked through and not allowed to be successful in hiding these bad actors or these failures by other corporations. 

Mr. ELLISON. That point is well taken. Going back to Mr. Cutler’s 

point, the fact that some companies have taken the step, are you 

submitting to us that should somehow be evidence that the ones 

who have not taken it, that means they do not want it, there are 

not shareholders who would like to see that kind of action, but for 

some reason, are curtailed in some way? 

36 

Mr. CUTLER. I would just say very briefly that I think it is a little disingenuous, with due respect to my fellow panelists, to say 

people are hiding behind this. Many corporations have participated 

in advancing the feeling that there should be a leadership structure 

disclosure and the board should make that appropriate decision for 

what is right for that individual corporation in light of some of the 

factors that my fellow panelist, Mr. Smith, mentioned. 

It may also be an issue in terms of evolution, in terms of either 

a new executive or an executive who has is to provide tutorage for 

one year. 

Chairman KANJORSKI. The gentleman’s time has expired. 

Mr. ELLISON. Thank you. I yield back the time I do not have. 

[laughter] 

Chairman KANJORSKI. The gentleman from California, Mr. 

Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. I may be unique on 

this committee in that I strongly support proxy access. However, I 

strongly oppose this particular bill. 

I would like to explore with the panel my concerns and see where 

you all fall. First of all, let me say that on the majority voting, I 

obviously support that. I think there is not a lot of controversy on 

that since about 50 percent of public companies have that now, and 

I think that is an important part, proxy access, for it to work. 

I also think that if you have these things, proxy access and majority voting, then shareholders have mechanisms through which 

they can express their displeasure with a company short of selling 

the stock, and therefore, I believe you do not need all these other 

things like executive comp and the chief risk officer and the board 

certification, all that kind of stuff. 

What I would like to focus on is the proxy access part. My first 

question is to those of you on the panel who support proxy access, 

my concern with this bill is that it allows the SEC to set the 

thresholds of proxy access, and they have indicated that 1 percent, 

3 percent, and 5 percent roughly for large cap, mid-cap, and small 

cap companies, are the proper thresholds. 

I believe those thresholds are too low and could result in a greater problem than not having proxy access for this reason: if a single 

shareholder or a group of shareholders who have a very narrow interest have access to the proxy to express that narrow interest, 

then that is not in the best interest of the shareholders generally. 

I understand all the shareholders have to vote the director in. 

You could have shareholders that are a union, a supplier, a customer, or perhaps have an event coming up where although they 

are a long-term shareholder, they have a very short-term focus because they have a sale event that is imminent for some reason. 

Any of those things, particularly in a small cap company, 5 percent share holding is not necessarily a big shareholder and is not 

necessarily a huge investment for a lot of particular institutional 

players. 

For those of you who support proxy access, do you share my concern, do you believe that larger thresholds, 5, 10, and 20, something like that, so you have to have an amalgamation of shareholders that would have to not represent a narrow interest but 

37 

would still be not a huge percentage but something like 5, 10, and 

20, which is what I support. 

Whomever wishes to answer. Mr. Smith? 

Mr. GREGORY SMITH. We have done significant work on that very 

issue because we are concerned about exactly what you raised. As 

a public pension fund, we certainly see the risks associated with 

giving people access to a proxy and the need to then be informed 

about who we are voting for on those director votes. 

The realities of who owns shares and how many they own and 

how you get to these percentages is very important to understand. 

What we did was do an examination of the top 10 public pension 

plans in the country and their holdings in a range of 10 different 

companies covering a spectrum of cap size. 

In that study, what we determined was that there were on average .86 percent of the shares were held by the top 10 pension 

funds. 

Mr. CAMPBELL. Combined? 

Mr. GREGORY SMITH. Less than 1 percent combining all 10 of 

them, the 10 largest had less than 1 percent of the shares. The 

highest they had in any of the companies that we examined was 

2.86 percent. That is all 10 of them combined. That is the biggest 

in the country, biggest in the world. 

Mr. CAMPBELL. My time is wrapping up. I know Mr. Rees wants 

to say something. I will just ask my second question, which is for 

the opponents of proxy access. If thresholds are larger, does this 

soften your opposition or change your opposition to proxy access if 

there are larger thresholds? 

Mr. Cutler? 

Mr. CUTLER. If I could, unmentioned so far is the position of 

hedge funds in corporations, and they are a considerable multiple 

of that figure. Obviously, the pressure from hedge funds for shortterm actions to lever up a company to take actions that are not in 

the long-term interest of the shareholders, we believe, or the employees or the customers, is considerable. 

Higher thresholds would help, but our fundamental issue is that 

we believe it is an issue of State law, not Federal law. 

Mr. CAMPBELL. Mr. Rees? 

Mr. REES. I would make two points. One, that under the current 

proxy access rules, many boards of directors would not qualify because the directors themselves do not hold 1 percent of the shares 

outstanding to nominate directors. 

My other point would be that under the current proxy solicitation 

rules, it is only hedge funds and takeover funds that are doing 

proxy fights today. There were 40 proxy fights last year which were 

dominated by short-term forces. 

Mr. CAMPBELL. I agree with your 2 year threshold, absolutely, 

but still, you can have a long-term shareholder with a narrow or 

even short-term perspective if the threshold is too small. 

I yield back. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Campbell. Now, we will 

hear from the gentlelady from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman. I have a question for Mr. 

Cutler. First, about majority rule. It is my understanding that in 

the last couple of years, 63 companies held shareholder votes on 

38 

whether to institute a majority vote rule, which resulted in shareholders of 27 of those 63 companies voting against it. Other companies did choose to adopt it. 

If the purpose of majority voting is to empower shareholders, 

what would be some of the reasons that nearly half of shareholders 

would vote against requiring it? 

Mr. CUTLER. I personally cannot speak for what their specific 

reasons were. I think the trend is the important one here. We are 

seeing a very high number of companies adopting majority voting, 

and while we think that is a decision that shareholders should be 

making for their individual corporations, there are situations 

where the preponderance of shares may be held by very few shareholders in some firms, often because they are smaller, and that is 

why we do not think there should be a Federal rule requiring it 

across the spectrum of all companies. 

Ms. BEAN. My second question for you is some have suggested 

that the risk of proxy access is that it would empower short-term 

holders, hedge funds, raiders, for example, to influence company 

decisions. Do you believe that could lead to more emphasis on 

short-term results as opposed to the creation of long-term shareholder value? 

Mr. CUTLER. We do believe that proxy access with those pressures can exacerbate the pressures that are already out there, the 

short-termism, and do not come simply from this issue of corporate 

governance, but from the focus on short-term profits and shortterm payouts of cash dividends, etc. 

Ms. BEAN. Thank you. My next question is for Mr. Smith or Mr. 

Rees. If the majority of shareholders at a company did not want 

majority voting, is it your understanding the current proposal 

would reject that option for them? 

Mr. REES. If I may, I believe that the proxy rules need to provide 

minimum standards for the election of directors. I believe that majority voting is one way to make director elections real accountability mechanisms. 

To the extent that shareholders have not voted in favor of those 

proposals this year, I expect that in future years, we are going to 

increase demand, but more importantly, you have to remember 

that many companies due to dual class voting arrangements, due 

to the bylaw restrictions that prohibit shareholders or require 

super majority votes to change the bylaws, shareholders do not currently have the mechanisms to implement reforms like equal access 

to the proxy or majority vote director elections. 

Ms. BEAN. Would the short answer be yes, their views should be 

rejected even if they vote against it? 

Mr. REES. The short view is that shareholders need to have their 

votes on director elections respected and that is why we need majority voting. 

Ms. BEAN. My next question is, there was an example that came 

up, and I forget who mentioned it, that Bill Gates obviously had 

been CEO and later chairman of the board, and you did not hear 

a lot of folks at Microsoft uncomfortable with that. 

For those who think that this legislation, which would disallow 

that, is a good idea, can you explain why? 

39 

Mr. REES. With all due respect, most publicly traded company 

CEOs are no Bill Gates, and if they were Bill Gates, then I think 

there would be less of a concern about the fact that most companies 

in the United States have combined positions of chairman and 

CEO. 

Mr. GREGORY SMITH. I would also suggest that had Mr. Gates 

had a separate chairman as opposed to his CEO role, he would 

have probably functioned quite well within that arrangement, and 

he would have communicated well with his board. He would have 

disclosed his management objectives and strategy, and he would 

have worked with the board chair, an independent chair, to come 

up with an agenda that gave the directors the opportunity to address that strategy. 

Nothing would have tied Mr. Gates’ hands by having a separate 

chair of the board. 

Mr. CUTLER. What you do run the risk of is legislating out talent, 

and that is a danger. 

Ms. BEAN. I would agree with you. Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Ms. Bean. Now, we 

will hear from the gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

Mr. Cutler, my father-in-law worked for Cutler Hammer for 

years, and last year he sent you the 50th anniversary brochure. It 

occurred several years ago. You kindly gave him a call and talked 

for quite a bit of time with him, and I want to thank you for taking 

that time just to spend on one of your former employees. That is 

very commendable. 

I have a big problem here. Is anybody proposing any legislation 

to determine when a corporation should incur a dividend or take 

that money and reinvest it into new structures or companies? 

Does anybody see a problem with the Federal Government making that determination? Or should the Federal Government simply 

determine the salaries of everybody at every level of the corporation, does anybody have a problem with that? 

I have a problem to the extent that the Federal Government that 

passes a health care bill that does not even know if its own Members of Congress are covered and has the chief spokesman going 

around the country saying nobody will lose their health insurance, 

that this august body is telling corporate America what is the best 

way to run your board of directors. 

Somebody has to come in here and say, if we had passed the 

Proxy Voting Transparency Act, the Corporate Governance Reform 

Act, and the Shareholder Empowerment Act, that this sage, this 

independent director would sit on the board of every major corporation and be there to stop any type of default on the part of a corporation. 

Can somebody answer that question? 

Chairman KANJORSKI. Will the gentleman yield? 

Mr. MANZULLO. Sure. 

Chairman KANJORSKI. You are asking some interesting questions. We are trying to establish policies here that could protect the 

American people, and since your side of the aisle just a short number of years ago suggested that all the Social Security funds of the 

40 

United States be invested in American corporations, then all the 

Social Security— 

Mr. MANZULLO. Reclaiming my time, I am just making the statement that just because something goes wrong in the financial markets, or something goes wrong with the corporations, that Congress 

sitting here taking the position that putting someone independent—how do you determine who is independent? 

What if a creditor gets on the board and he is independent or he 

is on the board of another company to which the corporation owes 

money and says well, you should do things in order to prefer creditors first? 

I do not think you can get anybody who is truly independent. 

Several CEOs sit on other boards themselves. That is okay because 

you have collective wisdom. You have lots of years of people who 

have seen mistakes, made mistakes themselves, and wanted to 

make sure those do not occur again. 

I just have a problem with every time something goes wrong, 

Congress sitting here trying to make these micro decisions. Does 

anyone want to comment on this? 

Mr. Cutler? 

Mr. CUTLER. I think as I mentioned before, the temptation coming out of any severe financial crisis like we just came through is 

the feeling that somehow it could have been prevented through different forms of corporate governance. 

I, myself, feel that we came through obviously a very damaging 

recession. We go through cycles, and we have been through them 

before, and the focus of financial regulator reform is that which 

gets at the core of the issue which caused the liquidity crisis. 

I personally have not seen evidence that the rest of the damage 

in the economy that came from that credit crunch came from poor 

corporate governance practices. 

I think the enormous revolution that has been occurring since 

2000 in corporate governance is a trend that we should continue 

to see play out, the independent committees, the improved boards, 

the independent selection of board members, the vigorous evaluation on an annual basis of board member performance. These are 

all very positive issues, coupled with the SEC’s new disclosures 

around leadership, around risk. These are important disclosures 

that are important for shareholders to have access to. 

Mr. MANZULLO. When you look at what happened—you see in 

Mr. Paulson’s book where he encouraged $20 billion worth of sales 

of stock of Fannie Mae and Freddie Mac, knowing full well that 

there would be a default on it, and a lot of community banks got 

stuck with it. 

The Federal Government’s role in trying to be independent and 

protect the shareholder is not exactly exemplary. Thank you. 

Chairman KANJORSKI. The gentleman from Indiana, Mr. Carson. 

Mr. CARSON. Thank you, Mr. Chairman. This question is for Mr. 

Gregory Smith. Among your proposed executive compensation reforms, you recommend stronger clawback provisions in legislation. 

There is currently language in Sarbanes-Oxley that allows for 

clawbacks due to executive misconduct. The definition of ‘‘misconduct’’ is really open to interpretation. 

41 

Please talk about specific improvements to the language that 

could be included in legislation. 

Mr. GREGORY SMITH. The language that is contained in some of 

our policies related to clawbacks focus on whether those clawbacks 

would be related to misstatements of performance, misstatements 

of financials, the ability to claw back because in fact their performance had been misrepresented. I think that is really the core of our 

objectives from a legislative perspective. 

We do not claim to be able to identify exactly what compensation 

should be able to be clawed back in every case. That is going to 

be a company by company determination, and I think it is important to recognize that in none of our reforms have we asked for legislation to set what compensation is going to be, set a formula for 

what compensation is going to be, or set a formula for what compensation can be clawed back. 

What is really important is that we have the ability to do those 

clawbacks but even more importantly that the shareholders have 

a voice in the boardroom to make sure that happens, and frankly, 

that it be put in the contract at the outset with that CEO so that 

he knows it is going to be clawed back if is misperforms, he knows 

they are going to pull those dollars back if he does not accurately 

represent what the corporation has been doing and what the financial condition of the company is. 

Mr. CARSON. Thank you. I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Carson. The 

gentlelady from Ohio, Ms. Kilroy. 

Ms. KILROY. Thank you, Mr. Chairman. Mr. Irwin, in your testimony you indicated that sunlight is the best disinfectant. Do you 

think then it would be a good thing to require all 13-S institutional 

investors to disclose how they vote their proxy, knowing how pension funds, unions, hedge funds vote, to add some transparency to 

the corporate election process? 

Mr. IRWIN. My comments today have been as the Federal legislation chair for NASAA, the North American Securities Administrators, and our focus has been on executive compensation. 

No one is asking today or NASAA is not, and the States are not, 

asking that there be a Federal determination by the SEC or anyone 

else or a review of wages or compensation in corporate governance. 

Rather, we suggest that there be review and disclosure so that 

shareholders—they are the best regulator of public companies— 

have access to the complete information. 

Ms. KILROY. I was simply asking whether institutional investors 

should be required to show how they voted their proxies when 

there was a proxy vote. 

Mr. IRWIN. I do not have a position on that, Congresswoman. 

Ms. KILROY. Thank you. Mr. Smith, your group, the Colorado 

Public Employees’ Retirement Association, I understand you have 

adopted a policy for your domestic proxy votes; is that correct? 

Mr. GREGORY SMITH. Yes, we disclose our proxy votes on a 

monthly basis on our Web site. 

Ms. KILROY. Do you think it would make sense to require this 

of all institutional investors over a certain size, say over $100 million? 

42 

Mr. IRWIN. Obviously, my board of trustees believes that is an 

appropriate practice for public pension plans and it is one that we 

are proud to be a leader of. 

Ms. KILROY. Mr. Rees, does the AFL-CIO support increased 

transparency by disclosure of proxy voting? 

Mr. REES. Yes, we do. We disclose both our guidelines and our 

proxy votes, and we believe that all market participants, all institutional market participants, including hedge funds, investment 

managers, and mutual funds—mutual funds are currently required 

to disclose their votes—should be. 

More importantly, we believe that companies need to implement 

those votes when adopted by shareholders, and that is why we believe governance reforms like majority vote in director elections are 

so important. 

Ms. KILROY. Thank you. Mr. Allen, CFA is the sponsor of an investor working group? 

Mr. ALLEN. Yes. 

Ms. KILROY. Am I correct that the investor working group supports the central recommendation of the disclosure of proxy votes? 

Mr. ALLEN. I believe that is correct. I cannot recall whether that 

was one of the provisions of the IWG report, but I do know that 

is something that the CFA Institute does support; yes. You are 

talking about the investment firms disclosing? 

Ms. KILROY. Disclosing how they vote; correct. Or unions or retirement funds. 

Mr. ALLEN. The idea is the investors in those funds need to understand how their managers are voting those shares so they can 

determine whether or not they want to invest in it. 

Ms. KILROY. Thank you very much. Mr. Smith, some of the members have questioned whether there should be Federal regulation 

or we should have State-by-State determinations and State-byState reforms. 

How would that affect a large fund like yours if you had State 

reforms to deal with? 

Mr. GREGORY SMITH. I have a two-part answer to that question, 

if I may. One is the burden placed upon us in understanding and 

getting a handle on 50 different States’ rules, it would be burdensome. It would impact our ability to be effective in our votes, and 

to carry out what we believe our fiduciary duty is, which is to vote 

those shares and participate in the proxy process. 

The question, I think, is one that is extremely important and one 

that certainly Colorado PERA hopes to get improvement on 

through this process. 

Ms. KILROY. Thank you. Mr. Brier, you were asked earlier to define ‘‘excessive risk.’’ Do you think it is appropriate for corporations 

to set up a risk matrix and have a professional risk manager but 

then repeatedly, over 30 times in 2 years, exceed those risk limits, 

and in fact, when they are exceeded, just simply increase them and 

fail to have that risk manager report to that corporate board? 

Mr. BRIER. I think the most important answer to that question 

is that through a market-based solution of enabling investors to get 

access to majority voting and proxy access will enable them to get 

a voice in the boardroom. That voice in the boardroom will focus 

on long-term investors, like us, risk management. 

43 

I do agree it is an area that one of the difficulties that long-term 

investors have is removing directors. You can know that something 

is wrong. You can have derelict directors. You can know that risk 

management is not under control. You cannot remove them. 

I think this market-based solution where long-term investors, 

long-term holders with a significant number of shares who get access to the proxy, who can use the proxy card of management who 

need to then go out and get a majority vote can get someone on 

the board to address this risk management issue. 

Chairman KANJORSKI. The gentlelady’s time has expired. Mr. 

Peters? 

Mr. PETERS. Thank you, Mr. Chairman. Thank you to the panelists. It has been a very interesting discussion and an important 

issue as well. 

I just want to address briefly some of my colleagues on the other 

side who have used some of the rhetoric that this is somehow the 

Federal Government interjecting itself in the management of companies, I just want to remind my colleagues that this is far from 

that. 

In fact, it is about empowering the people who actually own 

these companies. I think we have forgotten who actually owns 

these companies, and that is the shareholders. 

To me, that is about as pure of a capitalistic system as you can 

have, that you say the people who actually own capital actually 

have a say as to how that capital is managed, and hold those managers accountable to manage it and to increase shareholder wealth. 

This is not about Federal Government takeover. It is not about 

the government mandating. It is about the people who actually own 

these companies. 

I know shareholders are very diverse, including people who are 

in IRAs and 401(k)s and pension funds, who are investing their 

hard-earned dollars hoping that they have some sort of security in 

the future, and want to entrust that their managers actually have 

their interests in mind and not any of the short-term interests. 

I want to just touch on a couple of general themes that I have 

heard through the debate and then one that I heard from most of 

the panelists, that there has been a sea change in how boards are 

starting to govern their companies, and they have been standing up 

to CEOs and have been more active, and at the same time we are 

also hearing that more boards are also adopting many of the practices that are in this bill and in the Shareholder Empowerment 

Act, which I have authored. 

Those companies that are standing up to CEOs, are more enlightened, do understand that good governance also is correlated 

with good shareholder performance or good share performance, to 

me that seems as if it is pretty good objective evidence that what 

is in these bills as has been adopted voluntarily by companies, that 

have boards that are more active in overseeing and holding their 

management consistent, to me, that should be strong evidence that 

we should extend it to all companies because this is has proven 

good governance. 

No one particular panelist, is that a fair assessment of why it 

makes sense for us to move in this direction, because we actually 

44 

have objective data from those companies that are doing it, that it 

does lead to better governance and better stock performance? 

Mr. GREGORY SMITH. Certainly, the evidence that we see and are 

pleased to have had enough success to be able to generate that 

data. 

Mr. CUTLER. I would say there are selective elements that you 

are seeing broadly adopted. I think getting into areas such as a 

regulated solution to board leadership, a regulated solution to risk 

management, a Federal, not a State-based proxy access system, 

and then as we have talked about on another occasion, the need 

to address the efficiency and accuracy of the voting process, are 

really important concepts. 

Without that, we feel there are some additional problems with 

the proxy access proposal. 

Mr. ROBERT SMITH. I would just add the movement towards good 

governance, there is a pervasive attitude to try to vilify current 

CEOs at companies, but my observation has actually been that 

CEOs within our membership organizations have been some of the 

proponents of these changes and of good governance. 

There is a trend towards good governance and many of these 

same provisions are being implemented and do empower shareholders, but again, to legislate it so it is a one-size-fits-all on all 

companies, it seems to go beyond that, and it takes away from 

shareholders’ ability to actually decide what is best for their company. 

Mr. PETERS. I take a little different view, the fact that if shareholders should—every company should have the opportunity to 

make sure that the managers are caring for their interests and are 

looking out for their interests. 

It should not be just those companies that happen to be led by 

a more enlightened CEO. We are hoping that shareholders from 

every company have those protections. That is certainly what is the 

goal of this legislation. 

Mr. Cutler, we had a chance to meet earlier. I appreciate having 

that opportunity. You did bring up some concerns about the way 

elections could be hijacked. 

If you would just briefly touch on that, and I would like to have 

some response from some of the other panelists if they are equally 

as concerned. 

Mr. CUTLER. The elimination of broker vote, which our best data 

would indicate that about 15 percent of our average companies are 

owned on a retail basis, it has the prospect without improvements 

in the communication process today that assures accuracy of both 

the communication and voting process of reducing a number of 

votes that would be cast in an annual election. 

That coupled with relatively low thresholds for majority vote and 

the ability to pool shares or borrow shares holds the prospect for 

consortiums of a group of voters coming together to advance a special interest conclusion. 

We are also concerned about the potential for borrowed shares 

not being counted accurately, i.e., being double-counted potentially. 

That is why we are very pleased, as I mentioned in my testimony, 

that the SEC is looking at these issues. 

45 

The last issue is the very strong position of proxy advisory firms 

today. It is not a transparent process. There are some indeed conflicts in terms of understanding the vote, if you want to understand 

that from a company point of view, and that you end up paying a 

fee to get the information, and we think that consulting agreement 

is a conflict with the actual voting process, and the ability of 30 to 

40 percent of the shares being controlled on an institutional vote 

by the recommendations— 

Mr. PETERS. I know my time is expiring. Could I just have a couple of responses from other folks as to their concerns? Mr. Rees or 

the gentleman from Colorado, Mr. Smith? 

Mr. REES. Yes. We believe that we need to have minimum standards in corporate governance to protect investors. Otherwise, you 

will have a phenomenon where only those companies that have 

good corporate governance are adopting reforms, like separating 

the chairman and CEO, majority voting and proxy access, and 

those that are entrenched in unresponsive boards will be the ones 

that resist those reforms. 

That is why we need minimum standards. Thank you. 

Mr. GREGORY SMITH. I believe also that the borrowed shares 

issue is one that has been and is being dealt with by the SEC. It 

does not present a threat. The hedge fund risk or the claim that 

the raiders will use proxy access to disrupt companies, I think that 

is dealt with both by the thresholds required, and the testimony I 

provided regarding really where those volumes of shares could be 

developed, as well as the holding period. 

I do not think there are raiders that want to wait around 2 years 

for their opportunity to get one board seat. It is just not a realistic 

threat. 

Mr. ROBERT SMITH. If I may, there are many opportunities where 

boards are faced with long-term capital investments that do not 

pan out in the short term, and if hedge funds and day traders and 

people who have access to corporate votes have the opportunity to 

get in and influence it, then that short-term time horizon can get 

in the way of those long-term objectives and change the strategy 

to an annual focus or something with a shorter time horizon than 

a strategic plan would have. 

Mr. GREGORY SMITH. Ultimately, they would require a majority 

of the vote in order to accomplish that. We would still be protected. 

Mr. PETERS. I yield back. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Peters. Thank 

you, Ms. Kilroy. The two of you have done really admirable work 

in this field of governance. 

The subcommittee chairman wants to thank you. I know the 

chairman of the full committee wants to thank you. We are looking 

forward to further hearings on this subject. Thank you. 

To the panel, we want to thank you for being here. I have one 

or two notes I have to make before we recess to dismiss you. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

46 

Before we adjourn, the following written statements will be made 

a part of the record of this hearing: Carl C. Icahn; Tom Gardner, 

on behalf of Motley Fool; the Investment Company Institute; and 

Susan F. Schultz, president, the board institute, Inc. Without objection, it is so ordered. 

Mr. CASTLE. Mr. Chairman, I have a letter which we all had received dated April 20, 2010, to you and Ranking Member Garrett 

from a series of entities in opposition to some of this legislation. I 

will not read them all: American Insurance Association; Americans 

for Tax Reform; Business Roundtable; the U.S. Chamber of Commerce, etc. I would ask that this be made with unanimous consent 

part of the record, if we may. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Any other submissions for the record? We have completed everything? 

[No response.] 

Chairman KANJORSKI. I want to thank this panel. I hope we did 

not pick on anyone in particular, but I gained a lot of insight from 

you all. I am certain now we have more confusing time to spend 

to resolve this, but we will. 

Thank you very much for your public service. We really do appreciate it. 

Thank you and the subcommittee stands adjourned. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

April 21, 2010 

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