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For Immediate Release: April 18, 2007

REP. FRANK FLOOR STATEMENT ON SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION ACT

(House of Representatives - April 18, 2007)

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Mr. Chairman, I yield myself such time as I may consume.

   This is a bill to further the workings of the capitalist system of the United States. It has one very specific provision. It says that the shareholders, the owners of public corporations, will be allowed to vote every year in an advisory capacity on the compensation paid to their employees who run the companies.

   Now, Mr. Chairman, some might think this is unnecessary. In a better world, it would be. But there is not now any clear-cut, uniform, legal right for the shareholders to get such a vote. Some corporations allow it, some do not. Some boards of directors allow it, some do not. In a recent case, the SEC ordered AT&T to allow such a vote, but it was because of certain circumstances. There is no general principle that allows it.

   We do have, thanks to the Securities and Exchange Commission under our former colleague from California, Mr. Cox, a provision that I am sure many considered to be an intrusion into the private affairs of corporations, because without regard to the wishes of the corporations, the SEC under Chairman Cox has unanimously adopted rules that require corporations to put in the annual proxy form a chart of compensation for the top officials and an explanation of the theory of the compensation by which they are there.

   Understand that this is a decision by the SEC to require corporations to do what they would not otherwise have done, because it only applies to those who haven't done it.

   We add one simple fact here. The SEC has said that it does not have the power to go further and compel corporations to allow the owners to vote. Our bill simply does that. Our bill simply says, you will have on your proxy form, printed anyway, what the compensation figures are. There is no debate about how they will be presented. We require, if this bill passes, corporations simply to add to that a box that says ``I approve/I disapprove,'' and you can check it as appropriate. And the sole expense to the corporation is the ink in printing ``approve'' or ``disapprove,'' and the tallying along with the other tallying. There is no additional paper, there is no additional anything else.

   We have had a situation in which people, including the President of the United States, have acknowledged that in some cases CEO compensation has become excessive. I believe that that is clearly the case. A study done by Professor Lucian Bebchuk at Harvard, unrefuted by the defenders of the current corporate compensation system, notes that the amount of corporate profits going to the salaries for the top three employees, the compensation to the top three employees has about doubled to the point where a year or so ago it was nearly 10 percent.

   We are talking about real money. We are talking about money that goes to these top executives that could be used for other purposes. For example, when Mr. Nardelli of Home Depot received a $210 million good-bye kiss that had been written into his contract, when he was fired and given a $210 million consolation prize, Home Depot was at the same time announcing that they were putting $350 million into improving the stores. Well, suppose Mr. Nardelli had been sent out into the cold, hard world with only $50 million for the rest of his life. $160 million more would have been available to add to that $350 million for the stores, considerably more than a third. In other words, that was a real number. If $350 million can fix up the stores significantly, another $50 million or $75 million could have increased that by up to 50 percent.

   The President himself has acknowledged that the compensation has gotten out of hand. But from the standpoint of the President, excessive CEO compensation, increased inequality in our economy, which is a part of this, global warming, they all have certain common elements; the President and some of his supporters have reluctantly acknowledged the reality of those things, having denied them for some time, but they appear to regard them as facts of nature that were neither caused by nor can be corrected by human action. We disagree with that.

   Now, people have suggested that the salaries are too high and Congress should limit them. We reject that. This bill as we have presented it does not intrude into the process of setting compensation.

   Mr. Chairman, some of the amendments offered would do that. There are amendments that would alter the effect of this, depending on the kind and amount of compensation. I think those are erroneous. I think some of my friends on the other side have become, in their zeal to defend corporate compensation levels, de facto, in a bad situation. They would be more intrusive.

   All we say is this: The shareholders own the companies, and we believe the shareholders should be allowed to vote.

   Now, some people have said that is up to the board of directors, why are you singling out compensation for the CEO? And there is a good reason. You can make arguments about corporate governance one way or the other. We are not going beyond one point here. The relationship between the CEOs and the boards of directors is very different than most of the relationships the boards of directors have. The CEOs and the boards of directors select each other. There is a lack of an arm's length situation there that we think makes it appropriate to single it out and let the shareholders vote.

   It is only an advisory vote, that is true, and you will hear the contradictory argument that we are both too intrusive and not sufficiently intrusive into the affairs of the corporations. But we have more confidence in the boards of directors than some of our colleagues. Not completely, or we wouldn't have this bill. But we do not think boards of directors will likely disregard an advisory opinion from the shareholders and, therefore, we think that is an important input that the board should have. They have their ultimate responsibility, and maybe they will find some special circumstance that says, we can't follow in this case. The shareholders own the company, and we are simply giving them this right.

   The last point is, and we have heard people say, well, you are interfering with the affairs of the corporation. Corporations do not exist in nature; they are the creations of positive legislative action. No corporation anywhere has powers except those that are given to it by a government, and governments tell the corporations what powers they have, what immunities they have, and what rules they follow. The SEC just intruded very deeply into the affairs of corporations by requiring the posting of the compensation.

   We say that under current rules, including some State laws, and it varies from State to State, the shareholders don't have enough rights. And all we do here is empower the shareholders to vote on the compensation of the people who work for them.

   The last dogma I would deal with is, well, how can the shareholders know that? It is extraordinary to me, Mr. Chairman, to listen to people who ordinarily are quite respectful of the wisdom of the market. And what is the market? The market is the people who buy the shares. Those are the people who make up the market. And apparently this group of people who are the shareholders are in most respects quite wise. But when it comes to deciding how much to pay the people who work for them, they get stupid, and this is somehow beyond their capacity.

   We disagree with that. We think this is a moderate and temperate approach to the issue of runaway compensation, excessive compensation, not in every case, and in every case it wouldn't be used negatively.

   I should have said one other thing. No one has shown any correlation between these outsized compensation examples and any metric of success. Indeed, too often they are metrics of failure because they are payoffs to get people to leave quietly.

   So we hope that this bill will be adopted and that shareholders who own the companies will have the right to express their opinion to the boards of directors on the level of compensation for the top employees of the company.

 

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Mr. FRANK of Massachusetts. I thank the gentleman and the Rules Committee for bringing forward an open rule.

   I often disagree with my colleagues on the other side, but I have rarely before been as baffled by the illogic of their argument as I am today. I do not recall the last time I heard such a hodgepodge of inconsistency and inaccuracy.

   This is a bill that has been condemned for being, A, bullying and intrusive, and B, toothless. The toothless bully is, I guess, a new concept. In fact, let me begin with this denigration of the notion of nonbinding resolution.

   The gentleman from Texas kind of slipped, I think, when he said ``the sense of shareholder resolution.'' In fact, we spend much of our time passing nonbinding resolutions. Members who think nonbinding resolutions are a waste of time probably should just show up on Wednesday because that is all we do generally on Mondays and Tuesdays, although we are doing more since we have taken over.

   But let's get to more of the substantive mistakes. My friend from Alabama said we would be second-guessing every corporate salary. Of course not. That isn't even remotely close to being even partially true. We have deliberately said it is not our job to say what the salary should be. We are empowering the shareholders to voice their opinion.

   Now, I will acknowledge at the outset, if a board of directors sees a vote and the majority of the shareholders vote ``no'' and they decide to vote ``yes,'' the board has that right. I doubt that the board would do that much. In fact, I would not impute to the boards of directors what my colleagues impute to them, a contempt for the views of shareholders. There may be individual cases where shareholders didn't understand certain things, new events may have intervened. But, no, I do not believe that as a general rule people on the board of directors will ignore shareholders.

   And by the way, we are talking about the shareholders, and I know the gentleman from Texas said they are outsiders, they are activists, as loathsome a word as the rules of the House will allow as he would use it. They own shares. They are the owners of the companies. What a denigration of the people who are in other contexts the fountain of all wisdom. We are told the market is, after all, the best source of wisdom.

   The former majority leader from Texas used to say, governments are dumb; markets are smart, markets work well. Well, who is the market? The market consists of the people who own the shares in this case. How did they become so dumb when it comes to deciding how to pay for the people that work for them?

   And we are told, okay, if they don't like it, they can sell their shares. What a concept of ownership. I mean, these are the people, many of them who are outraged at the eminent domain issue. What they are saying is, if you have owned shares in a company for a while, you have made your decision that this is the best way to diversify your portfolio, and then some board makes a decision with which you disagree, that you think may hurt the company, sell your shares. What kind of a denigration of the notion of ownership is that?

   There are, of course, people who will tell you, wait a minute, what if I believe when Home Depot, for instance, did what it did with Nardelli, it had a very negative effect on people's perception of the company. One of the very decisions you disagreed with led to a drop in the value of the shares because the market said, why did they do that. Should you then sell your shares and be forced to take a loss or take corrective action and restore the value to your shares? That is what we are talking about. It is very simple.

   And then the oddest one of all is, how dare we interfere with corporations? Corporations are artificial creations of positive law. God made no corporations. No corporations evolved. I will be neutral on that subject. Corporations exist because the law of a jurisdiction creates them. It creates them to give them certain advantages, certain immunities, et cetera.

   Of course, the government tells corporations what the rules are. This notion that we are interfering with corporations is nonsensical. They exist according to positive law. And the law says, you must do this, you may not do that. That is what corporations are.

   And now the gentleman will say, oh, well, look what the SEC did, we don't have to get involved. What the Securities and Exchange Commission did was very intrusive. And the gentleman said, well, the corporation can do that if they want to; they could have published the salaries if they wanted to. The Securities and Exchange Commission said, we mandate you to print these salaries.

   And by the way, to the extent that there is an expense, it is much more in what the SEC did than in what we did. CBO has concurred, there is zero, maybe 8 cents expense here. The SEC has already mandated that the corporations print in the proxy form all this information. We mandate that they add a box, ``yes or no.''

   And then my friend from Alabama, great civil libertarian, but on this one I think he may have gotten a little too extreme in his civil libertarian zeal, he said, we are making the shareholders vote. It sounded like he said we are standing over those poor shareholders with a whip and making them vote. Well, in the first place, we are not. Abstention remains an option for shareholders.

   Secondly, the argument is, well, they already have that right, some of them. No, they don't in every case. There are corporations that have refused to allow it. AT&T was just ordered by the Securities and Exchange Commission to allow this procedure, but it was a case-by-case issue. It is not a general rule. So the SEC that you defend just ordered AT&T to do this, they just intruded, as is their right; but there is not a general principle.

   Shareholders do not have a right to have this vote on executive compensation. And this bill simply says, the people who own the company take what the SEC has mandated they put forward, has a right to vote on it. Now we are told, and the gentleman from Texas, in a stirring peroration, said he stood for truth, justice, the American way, et cetera; and said, let's reject the European effort.

   Well, this is not a general European practice, it is a practice in England, what we are talking about. There is a committee that is known as the Paulson Committee, because it was inspired by Secretary of the Treasury Paulson, chaired by Professor Scott of Harvard. There was the McKenzie report, done by Mayor Bloomberg, strongly supported by the Chamber of Commerce and all the financial groups. They have said to us, can't you guys be more like England in your regulation of corporations?

   Listen to the debate going on right now over relations of corporations in America. We are being told that the model is the British model, the Financial Services authority. This is Secretary Paulson's committee that said it, this is the Chamber of Commerce.

   Yes, the English do do this, it is not a big continental thing. But if, in fact, you think we should be very careful never to do anything because the English are doing it, then where is the repudiation of the McKenzie report and the Paulson Committee report which have urged the SEC to follow the model of Financial Services.

   In fact, it is very straightforward. Here is the problem. Why do normally coherent Members talk in less than coherent form about this, making contradictory arguments, ignoring reality?

   Here is the deal. My friend from Alabama said, I am not here to defend CEO salaries. But in fact he is, because what this bill says is, the shareholders, not the outsiders, not those evil activists, not those lurking labor agitators, people who own shares. And, by the way, this is strongly supported by the leaders of institutional shareholders, large pension funds, The Corporate Library. Shareholder groups are in favor of this. And it says that people who own the shares should be able to vote in an advisory capacity on whether they think the compensation is too much or too little.

   Now, the fact is that the gentleman from Alabama said there have been outrageous examples of excessive compensation. It is going up in general to the point where it is a record problem, and he says he is not here to defend them. He is not here to defend them verbally, he is just here to defend them parliamentarily, because if this bill dies, then they are totally unimpeded. And Members have said, don't rush in. Well, these salaries have been going up for a long time, and this is a long-time trend. So if not this, what do you do? It is true, the SEC went to the limits of its power.

 

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Mr. FRANK of Massachusetts. The gentleman misunderstands my point, and I will correct it. I am taking back my time. I was not referring to the gentleman's de facto defense of the salary; I was referring to the gentleman from Texas' statement.

   He denigrated the product of this legislation because it would produce a nonbinding resolution. In fact, he sneered at it as a sense of the stockholder, sense of the shareholder resolution. And my point was aimed at his argument that the notion of a sense of the resolution is meaningless would invalidate a lot of what we do. So that is the issue I was making.

   Let me just say in closing, Members on the other side sometimes get separation anxiety when they are forced to differentiate themselves from particular corporate abuses. They brought themselves to do it with Sarbanes-Oxley, but they are having in various ways buyer's remorse there, I think excessive buyer's remorse.

   Members say we don't like corporate excesses, but we can't do anything about it.

   Well, no, Congress should not substitute its judgment for the market, Congress should not set the salaries. What Congress can do is to empower the shareholders who own the companies to express their opinion. It is not a right that the shareholders uniformly have now. It is Congress in exercise of the legislative power to set the rules for corporations, which is inherent in the nature of corporations saying that on this one issue; and by the way, one reason for singling them out is, there is reason to believe that the relationship between the boards of directors and CEOs is not sufficiently arm's length for the decision to be left entirely to the board without input.

   It doesn't mean you take the decision away from the board elsewhere. It simply says there have been excesses in corporation compensation, we think it would be helpful if the shareholders could give an advisory vote.

   There is really no good argument against it, and that is why we have heard arguments against that aren't very good, that aren't very logical, that aren't based in reality. That is all we are voting on.

   And in the absence of this bill, Members can then take credit for continuing to enable salaries paid to the top executives to go up and up and up. And if you are a shareholder of a corporation and you think that is a mistake and you think that is damaging, you have the option, we are told, of selling your shares at a loss, of being excluded from an investment decision that you think is in your interest. That is not acceptable.