Transcripts For CSPAN C-SPAN Weekend 20090803

i am going to just go across as i indicated, starting with the woman who was the former female chief of staff. under which administration, ma'am? you richwere chief of staff undr which administration? >> the clinton administration. >> go ahead. >> my testimony is based on my 23-year career, culminating during the clinton administration, and also drawing on the past eight years when i aboard with communities and nonprofits in disaster management. erautt the 1990's, we were to respond and recover from over 300 presidential disasters. although we had many significant disasters, none of them became catastrophes. the scope could have made them to tass disease. for example, there was more infrastructure damage in an earthquake than there was during katrina -- the scope could have made them catastrophes. floyd could have been a catastrophe. because we build a strong partnership with state and local managers and that we have a federal response plan that was agreed to buy a federal agency including dod and executed under the direction of the fema director and we had leadership from the president on down committed to cutting red tape, being innovative and not bring being innovative and not bring about the price it is within this context out line to provide the thoughts and suggestions. in the immediate aftermath of any disaster with individuals in committees of the most is to get back to normal. this return to normalcy and abuse of the committees of rigid to rebuild safer and more environmentally and economically sound. over the more inflexibility and regulations on the part of the federal government program can it reinforced returning an agency to previous states. it is in the government's best economic and social injustice apparent expeditious recovery in rebuilding sam recommends the use. i was his as the president should have flexibility to request congress authority to a regulations and statutory requirements in the aftermath of a catastrophic disaster such as allowing for innovation in application, scope and cost of him is the disaster loan program. the cdl is an essential lifeline for communities to continue their administration legal functions after a disaster. when a tax base has been lost. i was suggests allowing match requirements for other programs and assistance of individuals and house of france and mitigation grant programs. this is out this impasse is will not have the funds. in the context of mitigation committing their son the public are most likely to embrace mitigation in the aftermath of disaster and to take iran's of the public's willingness the federal government can provide the incentive by waving across share. in katrina this was not done. and we also the problems people and communities are having into a elevations. rapid recovery of its committees infrastructure is critical to economic recovery in the current public assistance program is cumbersome and highly bureaucratic. after the northridge earthquake experts had fun in to jump-start the recovering in a similar approach my block grant approach that removes the issues of a pre-existing conditions as we talked about earlier will be absolutely necessary after catastrophic disaster second federal reports for long-term recovery is confusing and scattered. congress should request a federal road map for communities as to what the federal government can do to help them recover. where did i was suggests establishing a pilot program that would allow certain high risk of disaster prone communities to receive funding to do pre disaster recovery plans and strategies which will significantly enhance approval of projects and use an economic recovery the private sector is of the key to recovery in many to bring to the red tape to allow businesses greater access after is acid to make a finding a projects in assets possible and to provide more support to small businesses. we need to relive the approach to disaster housing and the program shows promise but will work? we don't know. illini use disaster housing resources to foster innovation, osher corrine billings and take a managed a successful nonprofit programs like social service testing database available housing units in real time. and perhaps hud and fema to work together to do inventory of some standard housing before the disaster. finally i continue to be concerned about fema being a part of the department of common security. i firmly believe that this organization will impede its ability to not only responded by certainly respond once a recovery in. i commend them for credibly qualified individuals in to fema such as administrator fugate, jason mack damares, bill caldwell and beth zimmerman and another will fall it well but the president doesn't begin to the issues that remain there. dhs is a law enforcement agency with a federal top-down approach and fema, on the other hand, works in partnership with state and local governments in the private sector to help individuals institutions and communities become social and economic is on a ferry ride to programs in mitigation prepared as a recovery. these very divergent missions require different set of capabilities and certainly different mindset. the post into them reform act was intended to strengthen fema, put a fence and resources and missions, however, it has been mentioned version of after passage this dhs coronation was created and given functions that duplicate that of fema's. i would encourage of the committee to request dhs explain how the dhs of this operation for the initial function in mcadam savages times as the fema center in another area is of concern is their numerous incidents of the council over really decisions made by the fema council in spite of the fact of the rulings made it made by experience lawyers and based on a fema allyson disaster president. since dhs centralize the general counsel function there have been many concerns that should a catastrophic disaster occur interpretations of the lobbies of disaster precedents and day in the flexibility of the stafford act will be overruled by lesson from and dhs lawyers and consideration should be given to allowing the fema and ms. j to add his independent counsel. we are discussing the issue of principle federal officials, i don't think that this is an issue that has been closed. i believe there is intense use the plo and we should continue to live two questions relative to that as the issue of katrina was who is in charge and frankly if we really want to address this issue of reducing bureaucracy for response and recovery in the next and a sovereign disaster in answer is to remove fema, make independent agency, reestablished federal response plan, not a famine, and creating national recovery plan. hurricane katrina was the villa of leadership at all levels but despite of the failure fema staff would have made decisions and take in ashes to correct the problems but they cannot because the this is an approval process was at dhs. while i recognize the obama administration is seven from the previous one and committed to providing service and the american public i still wonder and am concerned that there a few things have changed and of the process will work more smoothly as long as fema has to answer to that the primitive, security and as long as the fema administrator is no longer in a peer to peer situation with other cabinet secretaries and is to be extremely important one requesting needed resources from other agencies. a thank you, i will be happy to answer questions. >> thank you very much, frances mccarthy, congressional research service, the division a procession of federalism and emergency management. mr. mccarthy. >> thank you madam chair, good afternoon. is an honor to appear before you today. i work as crs and my previous 25 years at fema have been in areas directly related to the issues we're discussing today. several issues arising have to cut the red tape and a separate federal assistance. maybe the first question with respect the rules of the executive and legislative branches in traditionally both have been a key role. obviously the executive branch particularly fema and the stafford act, congress has authorized the sad to particularly in the subcommittee is amended to the years. also congress has both supplemental appropriations funded this fema and stafford act recovery programs and edition provided funds to other departments and agencies to meet specific deeds. oftentimes this has been ineffective in complementary in timber and punish him to address a complicated problems falling in large disaster that of assisted or several says. but within context of the discussions some have suggested for castoff against the legislation and discretionary authority to create block grant payments is needed and is no authority such as cross share waivers to speed up the process. some argue that while discretion to is as it means a disaster and catastrophic event to be by the president and might be more reliable approach to have a trigger is an amount estimated damage. the creation of a threshold and other exceptional procedures may be a critical part of the debate. current thoughts, share a clear but the standards are under pressure from states seeking a waiver of costs as a chair pointed out that many say is considered their disaster catastrophic at this time occurring so for that reason perhaps have a trigger when how to distinguish in the realm of a catastrophic disaster. an additional consideration might be in the threshold for expanded assistance has been reached to continue the president's notification to congress of the use of catastrophic authority is similar to the procedures currently for emergency spending. the notification to serve as a vehicle to engage in the congress with potential funding requirements and suggested legislation that the move through response and recovery. i have discussed in the alternative funding proposals to my written testimony. one question would be how to determine and should the amount of block grants meets the needs of the right to area and is important to note that while assistance to individuals and also mitigation grants are caps there is no cap on the amount that may be spent for eligible projects swell the block grant is appealing particularly for speed and clarity it would also likely be in amount certain of the amounts under section 406 contained and a crew based on the actual repair or replacement work and one option might be to use the initial blogger and as incremental down payment on public disaster costs fell in the initial block grant the process could then be used to ensure an ability and complete the funding. one other consideration is all the ideas for up-front funding underlined the need for quality damage assessments banking give a clear indication of the scope and extent of the damaged. in discussion of approaches the proposals assume such would be available under catastrophic warming disaster and by investing the authorities before he and is arguably would permit this of this flexible action without the necessity of authorities legislated as disaster unfold. however providing such discretion to leadership by provide the possibility of an effective action. the me briefly summarize some of the options as mentioned in my testimony. number one provide within and to invoke authorities including block granting to send note localities and provide a comprehensive recovery appear in a to install it jigger that a priest was set in motion a catastrophic increase and fuss of assistance and also jigger nofication of potential needs and resources and authority. to replace a listing of program changes that would take an eye toward catastrophic event including cost shares for specific programs and other news and has a mitigation assistance. it clearly defined the role and that of other agencies and departments and state and local governments and work. and for interactive fema recovery from are similar to the response remark but with an emphasis on long-term needs of this could include alternative housing scenarios when large numbers of displaced and define the relationship and disaster housing. consider other agency authorities as to be triggered by caddis having events such as the block grant program as was mentioned here to continue to have, alleges that a recovery package across the government to address the needs of is a killer catastrophic events and finally considering establishing a reporting framework so that all disaster spending including but not limited to the disaster late fund is captured and summarize for congressional review for a catastrophic events. i appreciate the opportunity to appear before you and welcome any questions you might have. but me first say that the kinds of things that the stafford act or natural disasters and the history of disaster relief focused on the capacity to assist and provide supplemental assistance. but the country today faces very different risks from those that we faced when the stafford act was first signed in 1988. if you'll remember, that was two decades ago. globalization has changed the way we were linked to other countries and events. problems in the harvesting in china could cause an enormous consequences in what we eat in america. we are increasingly dependent on food coming from other places. one-third of all the apple juice products come from china. i think we have to be aware that disasters are no longer rooted in our local environment, but they come from other places. -- the failure to maintain the power system led to the interruption of the entire northeast. more and more of public life -- it can have serious and widespread consequences on the entire nation. let me point out that this is in disagreement with the speaker from fema who basically talked about in this only in the context of communities. while the impact of catastrophes will be held at the federal and state level, the impacts are more devastating at the community level. it must be designed to calibrate and returned to self- sufficiency. this is a terrific point of view, but it may not be appropriate for the 21st century. you may remember that he said that the key challenge would be to return to normalcy. i want to point out that this is the greatest myth. we have learned from september 11 that there is no return to be normal. there is a new normal, but it is not the old normal. people who live in these communities can tell you that it is different after they experienced that. we need to recognize the changing scales catastrophes. they destroyed the community and we must look at how this affects our economy. it must go far beyond supplemental assistance. clearly, we have to recognize the possibility that catastrophic disasters require much more of the federal government bring back a community to where it was before him. i want to end with one final point. there has been a great bit of attention to housing. after a disaster, quality of the water supply is far more important than housing. the same thing goes with energy and communications. the focus on hugged his exaggerated. it is not necessarily -- the focus on a to dhud is exaggerat. >> thank you very much. >> thank you very much dr. moss. aggregate general donald dumbo? thank you, madam. chairman norman, as the aggregate general, i served as the commanding general for the international guard. i also served as governors advisor and i have responsibility for emergency management. i appear before you today in uniform and i am a federal recognized of us of but i appear as a state official, not on federal military orders and i represent the state of wisconsin in the national governors' association. i would like to start by thanking the committee members. i work closely with them. my testimony today will briefly touched on three areas. first, the federal-state partnership and the need to clarify the role of the military, the role of prepared as guidelines and the need to better target grants. we have experienced many emergencies, three of which led to a federal disaster declaration. under difficult editions, we serve the people of wisconsin very well. these are heroes that are committed to something larger than themselves. i am also proud to report that the wisconsin national guard was able to assist in these emergencies. in keeping with our guidelines, we respond to the emergency management framework. several times in the past few years, the department of defense has use existing law. each time, including most recently, the nation's governors and their aggregate general has proposed legislative change. the operation -- the national governors' association and the aggregates general association of united states believe the controls should be under the governor. this should occur unless and until the federal government must take control. we believe these situations exist we believe that this is necessary to ensure unity of effort and is consistent. turning to the federal prepared as guidelines, i can share with you the wisconsin -- wisconsin recently updated our homeland security strategy. it is our vision to foster a culture of prepared this and continually improve our capabilities at every level. with resiliency being the ability of citizens to successfully cope with and recover from an emergency. our strategy specifies for lorries with many goals and set goals to which we apply an analytical framework. our strategy will guide our investment of state appropriations and federal grant allocations. this will allow us to integrate homeland security efforts, measure improvement and prioritize our investment justification. lastly, wisconsin is developing metrics to measure our progress. for this, we rely on the federal government. it is our belief that these national capabilities, developed apple local level will reach of emergency preparedness. it will defy gaps. the department of home when security has signaled that future grant awards may have some planning in investment justification. if so, this may significantly increase prepared this. in my view, to be successful, they must focus on capabilities but allow for full development and sustainment. too often, in the past, the guidance as to change your to year. i look forward to your questions. >> >> thank you very much general dunbar. matt thank you for your service as well. david maxwell, vice president of the association. >> thank you. distinguished members of the subcommittee, thank you for having me. i am the director of the homeland's security adviser. i am testifying on behalf of the emergency management association. the definition of catastrophic disaster is is an issue that we have been discussing since hurricane katrina devastated the gulf coast in 2005. what may be catastrophic in one state may not be catastrophic in another. this would be catastrophic for the entire region is not a nation. they require additional response and recovery efforts that we have seen in the past. the stafford act was written broadly to allow presidential discretion and flexibility. we believe that i necessarily a strict interpretations of the law are more problematic and the law itself. fema policies and regulations are overly restrictive and do not reflect the original intent of the stafford act. further, they are often inconsistent between states and regions. as field personnel changes, decisions are frequently overturned. the appeals process takes months and sometimes years. this is due to subjected das subjective interpretation -- subjective interpretation. attorneys and auditors take president. these issues served to create a federal bureaucracy that could paralyze the disaster response and recovery. we recently established a working group to establish if issues can be addressed. our work has just begun, so i am not in a position to share specific recommendations with you, but we commit to sharing our work with you in the future. i am confident in stating that we believe the federal government is not fully using the power of the stafford act. if it is legal, moral and ethical and the right thing to do, we should do it. arkansas has benefited from the catastrophic planning initiative as we prepare for the possibility of an earthquake. there is little experience to draw from with regard to an earthquake. in arkansas, we think we know how the roads, bridges and other infrastructure will perform, but we are not 100 percent certain. our plans to remain flexible. i would encourage congress to continue to support and fund famous catastrophic planning initiative. the national level exercise in 2011 will be focused on an earthquake. we are pleased with the leadership of the month. they are innovators and had a vision for world-class emergency management system. now is the time to redefine the outcome that we want in large- scale disaster response and recovery and to define legislation and policy to support the outcome. we must also do a better job of leverage in all of the resources available to us. including the public and private sector. government can't be solely responsible for recovery, nor should it did. in most situations, government does a good job of disaster response. while each disaster is to me, it would be extremely helpful for state and local officials to know in advance to the type of assistance that may be available to them for long-term recovery. in addition, having a federal counterpart would be helpful. this is an ideal world for to in my. -- for fema. i have included several suggestions in the written testimony. the main point that i would like to make is that we need not be combined into outdated systems or approaches. particularly for large scale events. we should define the outcomes that we want and build and resource the system that supports that outcome, build the team that can manage the event and provide leaders with the discretion and flexibility to insure a successful outcome. thank you for the opportunity to present testimony before the subcommittee and thank you for your strong support for emergency management. >> >> thank you so much. mr. decker? >> i am the director of emergency management for allen county ohio. i am currently the president of the u.s. council of emergency managers. i have 19 years of emergency management experience. our membership of 4000 local, tribal and non-profit sector members makes us the nation's largest association of a management buyout emergency management officials. basically, we need to ask what is to be done to insure rapid response to catastrophes. we were also asked to suggest to a disaster -- suggest a response to a disaster. this is very difficult. in a larger event, the rapid mobilization of federal assets is imperative, but those same resources must accept the civilian chain of command. given the difficulty of defining a catastrophe, we believe that caution is in order. we would urge caution in making statutory changes which enhances the role of the federal government at the expense of the authority and responsibility of local governments. consistently stress that rebuilding of the emergency management system. this system of rebuilding must include the restoration of resources, personnel, and authorities at all levels of government. without such a collaborative, coordinated and comprehensive system, we will not have the ability to act decisively and with sufficient flexibility. the stronger the state's programs are, the less assistance we will need from the federal government. we ask that the current fee maladministration be given the authority and resources to do their job and we urge that the upcoming regional administrator appointments consider state and local managers as candid as for those jobs. what is needed most in any disaster is flexibility of action and speed in decision making. we do not need duplication of responsibilities and confusion over the chain of command. the activities of the office of operations coordination means to be examined as a currently duplicate functions performed by fema. we continue to remain opposed to the appointment of a official and we strongly support and applaud the prohibition. we recommend that this committee task seemed to perform a study of their work force to restore -- to assure they have their responsibilities. they should take a look at policies and procedures. after that review, there should be discussion of what authority may be needed. it changes in authority are needed, we recommend that they be replaced -- a place in the act. -- placed in the act. we suggest increasing the 500 million-dollar cap. on the policy front, project worksheet system is too cumbersome. having checkers checking checkers every -- over and over again and then have a new official say that it needs to be redone is frustrating. perhaps we need to take a new look estimating and providing block grants. post areas need to be treated differently than they are now permitted the dallas county texas emergency manager advised me that dallas and other jurisdictions have not yet received full reimbursement for their assistance. the ability might be impacted by this lack of timely reimbursement. we join the and we want to create -- they to me the plan. we think you for this opportunity and we look forward to your questions. >> thank you very much. finally, jo becker. welcome mr. becker. >> thank you very much. thank you for holding this hearing on this important matter and i appreciate you inviting your participation. there has been a lot of discussion about the certainty of the next catastrophic event. i thought it might be helpful to quantify some of the human need that would result that we have imagined could happen. not even counting man-made events, just within the earthquake and hurricane scenarios, we know of scenarios that would be four times the size of katrina and possibly larger. that is based on the human need the earthquake and hurricane scenarios were present us. as a country, we are not ready for scales of the size of an event. we have had a lot of conversation this afternoon about the types of issues and i would like to confine my comments to what the rest of the panel has not discussed and that would be to go back to the housing and human service side. we are the red cross. but we shelter people. we are discussing the long-range recovery buhousing issues. there has been a lot of conversation about coming up with a definition of a catastrophe. i would suggest that for a practitioner who is working with government but is not part of government, its debt -- as scale disaster increases, you open up more shelters and increase your supply chain. the catastrophe is a disaster where more the same as i get to where you need to go. a catastrophe is a disaster where the normal business methods won't work. that is where -- what we have experienced a couple of times. how you have people who leave the area and have no options for housing. they cannot come home. they cannot come back to their jobs or their communities there are evaluated and become residences of other areas for much longer than anyone imagined. i have heard a lot of questions about what the answer to that would be. i would suggest to this panel that there is no one answer to that. we need the infrastructure and then we need a range of housing options within the affected area, not just more mobile homes. yes, the addition of hud housing has helped in the recent disasters. the additional rental assistance has been helpful. if you do the math, the sum of all the options that we have an hour tool kit today is not big enough. no one option is the answer. the answer is to maximize each of the options, to develop new options and great work is being done in this regard. maximizing options, developing new options. this is not something that fema does. this is a decision made locally with and by fema. we need the research work done. we need to let state and local government work with the month. as juneau, the urban solutions are very different from the real solutions for distance matters greatly. i would suggest that the task force that has stood up to be the focal point needs to be energized and move more quickly. i think we heard the administrator speak to this. we're not constructing a response community have been dealing with the exceptions, the exceptions being the frail elderly or children with disabilities or people with medical needs or people with pets. of those are most of the people we are dealing with a lot of these disasters. they are not the exception, they are the model that we are building. i take that that work needs to continue. lastly, we focus a lot, buildings. when we move people hundreds of miles from what used to be home, the social services have not followed. the medical care, the wide range of needs that people have when we relocate them great distances are exacerbated. so, we have to bring the services to the people and that is where integrated case management really matters. we have a great case managed -- management and pilots. -- management pilots i am not saying what the money's to do. this is what our country needs to do. this is what they need to do. i ask you to support this approach in this important work and i thank you for your hearing today to make that happen. >> thank you, very much. just to lay some of the framework for the rather large questions that we ask, i think the general public would be amazed to in -- to learn that the scenario of focusing on a man-made event, by engaging in a real time exercise perhaps some of you who have been in a matter urgency management that are also at the table, perhaps you can make us understand how, after decades of the mafema, had it occurred to anybody that the kinds of disasters we have to prepare for every year requires realtime exercises? why does not occur before? -- why does not occur before? we certainly don't bank that the federal government lacked the ability to do some kind of national level exercise or somebody has to say they have the authority to do such an exercise with respect to propose. why, in your judgment, what, or seven years after 9/11? why is this occurring now and not before. if it is in our faces as clear as the nose on your face after 9/11, we had such an exercise, why, given the scale disaster even before katrina was this not done? >> mr. maxwell, or any of you. >> i will take a stab at it. i think that part of this is that the national level exercise series developed out of the series that was done? >> do what? >> the top officials program that was done. for a long time, the states and regions have practiced natural disasters and i think that we were -- >> at the direction of the federal government or on their own? >> on their own, to some degree but with the federal government as well. >> a terrorist attack is not likely to be some kind of bomb that incinerates the united states. yet, we had national exercises there. >> i think that to some degree, we have that. we went through several scenarios. we're getting back to the need of doing those high level official exercises with natural disasters as well. >> it makes one question -- you agree that it was not a lack of authority? >> no ma'am. >> i think it was you that cautions the notion that this may be necessary. we did look at the statutes. if you're going to go at doing something major, do not nitpick the authorizing statute. do the agency what it needs to proceed. you look at that stafford act and you see as broad a mandate as you're going to find anywhere. yet, over and over again, the mayor said that they didn't think they have the authority to do this and exasperated the patience of the people on the ground. are you suggesting, mr. decker that there may not be necessary to deal with the troop catastrophic disaster given what you have seen? especially when you see this at the expense of the state and local governments. we are suggesting, if any thing, that our role is supplemental and we mean it to be supplemental matter what you call it, but you can call a supplemental all you want to when it comes to katrina, but you heard was questioned $3.4 billion. we're not about to authorize that for anyone else. so, we are left with we need to know how to do this with agencies. precisely because we never put anything in the statute to say what to do. they are sitting there with their, in their mouth. we had people on the ground tearing their hair out. let's assume that off the table is moving out what state and local government would be doing. remember, the administrator testified that he told the administrator, recently, while he was on the ground, to stop sending stuff to was that we don't need. the administrator said yes sir. he had the backbone to stand up and say not to do that. we saw fema or ice on the second hurricane down there with people laughing at the agency all over the place. assuming that we are not trying to do anything at the expense of local and national government and still regards that, would you or any of you believe that clarification of statutory authority is necessary for, given the broad language of the statute, should fema just tucker down and lifted care of itself? >> >> madam chairman, i think that what our members are trying to stress is that we do that and do not lose the command or control. >> do you really think that we're looking to do that? >> our concern is that if you leave it under stafford, it needs to be within staffer because we believe that it is a stafford act event and we have a es c.e.o. coordinating the activity, and not -- and have an f zco coordinating the activity. >> are you confident that you would want to be able to categorize it as a disaster? are you satisfied that that will happen instantly? >> we have not seen anything like that in our lifetime. everyone tells us it is coming. but some think this is the finding the catastrophe and that is the hardest part of this. the impact on the rest of the country is going to be what defines it as whether or not it is a catastrophe. >> my governor probably would not like that. of thing that the definition of catastrophe has to bid what the major impact on our nation is. >> dr. moss? >> i want to point out that there is a legislative mandate already and mr. mccarthy pointed this out. it is to create a national recovery from work and i think that the mayor has done this with a planning framework i think you have -- for an art. i think you might want to direct them to do it. >> if that happens, then what? >> unit to start thinking about the recovery process. i think the fact that -- certainly there was an issue raised about the red cross. understanding what is involved in recovery has been one of the many flaws. >> by the numbers or by what? >> what is it take to have recovered? we have heard a lot of discussion about housing. but the problems you have when you decide to move people more than 100 miles from their location, things get much worse. i think that asking fema to carry out what you have already asked them to do might be a good start. >> this book? >> -- miss bullock? >> the beauty of the stafford act is that it would give the agency the latitude to think outside the box and to do innovative programs. if they're going to work on that. i want to question you on that in particular. let me tell you how federal officials operate. they are afraid about our committees. it takes very independent, intent upon -- as a member of this committee, i think that what we have seen in federal bureaucrats does not give me a comfort to believe that regardless of the bureaucrat, the person will understand. that is why we are looking at the president. somebody has got a signal -- has got to signal so when the figures begin to point you can tell them not to send anything else here. the hit -- he can say i asked the secretary not to send any more. even if it turns out he was wrong, we have to risk being wrong sometimes. i tell you, in risk of this concord even after katrina, we passed that. the committee of the federal bureaucrat was on display every time we had a hearing. no matter what the mandate, that gives us -- it makes us tremble a little bit tarasco calls the shots. -- it makes us tremble a little bit when we asked who calls the shots. it was dr. moss who cites a perfect example of national significance that somehow, they have to wait for dhs. nobody at dhs had any experience. only fema did. this was an incident of national significance and you have to do that first. whereas, 04, fema use all its expertise and said to the president that this is the accident and the mall was out like lightning. we have gotten rid of this incident of national significance. we still do not have confidence that we will see the kind of instant action if a catastrophe, something that we have never seen before. they do not have any oil in ohio. somebody has to make the call. my answer is, if somebody has to make the call, does the statute have to say who should make the call? or, it is all you need is some backbone? we have to make a judge for one way or the other. >> i would argue that the statute provides the authority but you are exactly right. it all goes down -- i think we are naive to think that if we have a major catastrophe, secretary of molto know is not want to want to clear a major role in the disaster. i think we're just being naive if we do not look at it that way. therefore, the statute may need to be made stronger to clearly say that. just to go back to the recovery issue, if congress doesn't do this, it is never going to be organized because the agencies, during the 1990's, we used to bring all them together. we would set them in a room and would come up with an ad hoc reports that will talk about what each federal agency was going to do to support the community in the aftermath of the disaster. we did that because the president wanted fema and the federal emergency management agency to take that role. that is not in stature anywhere. i think that is something that is to be done. >> now you're getting into real be my is not a cattle -- a cabinet level -- fema is not a cabinet level agency. clearly, the but the cdc up front. if there were to be an attack involved and biological weapons, i am not sure who would do that, but somebody will have to make that call for us to be fooling around with whoever is the lead agency, you're not want to tell the secretary of the xyz what to do. that is a bureaucrat's behave. that is why we are looking at how far we should go. we are very reluctant broaden an already broad statute or to pull it then. we just do not want to be sitting here with the next one occurs and nobody jumps up and act like he knows what he is talking about. for that matter, general dunbar really complicates matters for us but rightly so. . . @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @@ d guest: my pleasure. host: we have a half-hour left in our program. joining us now is allan sloan, senior editor of fortune magazine to talk to us about social security. you have a piece you have written d we can see it today in "the washington post" -- called a flimsy trust. was social security needs major repairs. what do you see right now? guest: fantasy numbers, and if you look it those numbers the social security looks healthy, but if you look at how much money is coming in compared to what is going now, we either have a problem now or are about to have one. host: the problem you point out is something we have heard about in washington for quite a bit. the intake and the outflow. you say it is coming sooner than most might think? guest: yes, it might even be here now. the numbers are not available. so you cannot really tell. but the money coming in is way below people were projecting a there are fewer jobs. fewer people are paying into social it still has the same amount going out. host: what does this mean for the budget? please explain the economics as simply as you can. we hear washington talking a lot about health care and budgets and deficits, and the like. guest: the way social security works you could spend two hours talking about it. you'd still be hopelessly confused. i am hopelessly confused and have studied it for years. it is just a question of money now. social security either this year or next is likely to take in less money than it spends the which means it will have to get money from the treasury. i define the as of bailout. it is either here or around the corner. -- i define that as of bailout. host: here are the lines to phone in with your questions or comments. this is allan sloan, a senior editor of fortune magazine. you can read his thoughts there. we also see him in the business section of the paper today. major repairs, what is the fix? guest: again, it is the same fix as it has been for a long time been a people take less money out in the future, including those like me who are very well off, then we were originally entitled to. people retire later. and people pay probably somewhat more taxes. it is just a question of numbers. healthcare is really complicated. it involves very complicated things. not to make fun of social security, but it is only about money. money you can figure out in compromise. health care is much more complicated. i have stayed as far away from it as i can and will continue to as long as the let me. host: before we go to calls, bring us up-to-date on action here in washington, if any. what is congress thinking now? what is the administration thinking now on this issue? guest: some longer-term people say healthcare first as in social security. you are in washington and notice difficult to get more than one thing at a time going on. healthcare is all-consuming. but if you speak to moyer, the majority leader of the house, and talk to some wonks, you can see people getting geared up for later this year or next to try to do a commission to deal with social secured. i was trying it in the article to explain in english with the problem is. people like me have paid in much more than we will get. that is fine, but the government -- even though the garment is $200,000 per head, will have to borrow money to pay our benefits. that is when the trouble starts. host: as we look at the cover and speak with allan sloan -- the biggest bailout yet. we're talking about social security. minnesota, first off, on the independent line. jack, good morning. caller: good morning, and gentleman. i hope that your article focuses on a couple of things. -- good morning, gentlemen. i will focus on fica tax. it was supposed to be a dedicated tax. it is a wet dream as far asneo- liberals andne neo-cons. it is extremely progressive as a general revenue tax. guest: it is. caller: unfortunate, it was never considered to be a general revenue tax. it is dedicated to pay only for social security. i believe that is written into law. i hope of future callers can reinforce that. the problem is the 1983 fix which turned out to be a disaster. people who devised that should have known that. anytime -- though fica tax was essentially double. it provided a huge surpluses. up until this point it still is. those were intended to pre-pay for the demographic bulge of the baby boomers. it was used to pay for our empire, the iraq war, money to israel, etc. -- and that money needs to be paid back. it is tough if it is going to be hard on the wealthy. they need to pay back. guest: that is exactly what i write and what is in the article. the 1982 problem. i looked at the politics, but that is exactly the problem and what i wrote. host: next call, mich., on the republican line. caller: sir, if social security would be done away with -- medicare, medicaid, you might as will be saved from the one rule government. we will no longer be america. it impacts every aspect of our lives. dismantle all of those and make it federal, or taxes, or whatever. we will cease to be america. host: let's hear from our guest. guest: healthcare is off the table. it is not what i did. what i'm a greed here is explain what is going on was a security and relatively -- what i am a creep hewriting here is how is d be for it to be changed with social security. host: remind us of the history of this program. its original intent of the ex tell us about its changes along the way. guest: it began in 1935. it was under president roosevelt. the point was to make sure that all people did not starve to death, to be blunt. back then there was no means of support. there was a depression. you went on home relief if you could get it. it began as a system to keep old people from b poor. in 1935 if you were 65 years old you are really an old person. i am nearly 65 and i am not an old person. then along the way, congress began to add benefits, sweetened it. the taxes went up. in 1983 social security almost ran out of money and had to borrow from medicare to pay the checks. we then had this tremendous revamping of social security which raised the taxes, made the program bigger. but for whatever reason, no one figured out a way to set the money aside to prepay for me, you, and some of our callers. now on the books we have a healthy looking system, but it has the money. host: explain the trust fund. there's an interesting" sure i would like you to elaborate on, from david walker. the trust fund has no financial significance. if you did bookkeeping like that in the private sector you would go to jail. what is he talking about? what are youwriting about? guest: ok, i talked to him about this for years. the way that this works is buying law social security which now for 25 years took in more money than it spent. it took the extra cash and give it to the government. the government gave its treasury securities. so, this came down reported budget deficit for reasons i don't want to get into. it made social security look very healthy, but the problem this that in order to turn these trust fund securities back into cash, the government must go out and borrow the money to buy the securities so that you and i can be paid. so, in the real world or corporate america if you did bookkeeper it would never be allowed. he is exaggerating some for dramatic effect, but in corporate america a company with publicly-traded stock or debt, if it did anything like that there be in trouble and seconds. host: fla., on the line for democrats. caller: i and nonrailroad returned. i believe they put it -- and i am on railroad retirement and i believe it is the same as senators and congress people. we get no increase, but they get 7% of an increase this year. my wife and i, as soon as i turned 65 a lost all my medical. my wife has no medical. i'm paying $511 per month to keep her cover. all i get from that is a $40 copiague. host: want to add anything there? -- >> all your from that is afford a dollarco-pay. guest: the consumer price index is down. that's why there's no increase in the social security benefit. i know nothing about the railroad retirement benefit. as for congress, they are your problem in washington ago i live in new york and stairway at all times if i can. host: one viewer asks by twitter that if the income limit on social security tax were eliminated, would fix the program? guest: the limit is over $100,000. let's say if you took off the limit, you'd be quadrupling the tax for many people who make more than $107,000. if you do that for five minutes to a balance soldiers security, but the first time there is a conservative administration and congress if you have imposed another 12.4% income-tax which is what this is on everyone making more than that amount, even people like me who really loves us as a dirty and honored for what it did for my parents, to say suddenly -- who really like it -- you have to pay this and no one has to retire later take a cut in benefits, we would just take your money, people in my income class will turn against social turnen masse. the next time there is a change in a master's in you will not have social security. -- there will turn against social security en masse. we have to do with it in a way that does not alienate an comeclasincome classess. . caller: i have to take exception to what he said. if people who make over $100,000 per year against the rest of theclass, that amounts to class warfare. in 1983, someone said the baby boomers would retire in 25 years and what are we going to do? the money was never intended to go into the general fund. the laws written says it has to be satisfied. the government has barred incessantly from this fund. now at 58 years old, i look and see that will not happen. secondly, my 401 has been decimated. thirdly, my house value has fallen by 25% in the past year. and i listen to focus gentleman makes a lot of sense in many ways. the problem with social security is not the baby boomers pinup we have been paying into it. the problem with social security is that people in washington have beeno guts. the do not have industrial policy, so our jobs have been eliminated. it reduces the amount going into this. lockbox -- i laughed when i heard that term. thirdly, you are telling us that you have to work longer. i already have to work a year -- and i do not have a problem. i like to work. i like to work. i have no problem working@@@@@@ saying and proposing to fix by having the government bailout the social security system a little at a time. if we can bailouts every bank in creation -- i'm exaggerating -- we can bail out people under water on their mortgages, insurance companies, then we can bailout the people who have paid for their entire lives into social security. we can make it work. it is not that hard. we just have to summon the will to do instead of pretending everything is ok. it is not. host: another message by twitter. why do we get more money -- what do we get more money by taxing more in giving people the option not to participate? guest: well, no. this is social insurance. everyone pays and every gets. when i was shoyoung i benefited tremendously because my wife became a full-time homemaker when we had to amiga i did not make a lot of money in newspapers as you can imagine. -- when i did not make much. there were survivor benefits if i died young. that would have been a tremendous benefit to my family. thank god we didn't need it. left to my own devices and never would have bought it. i would have thought i would live forever which is what young people generally think. if you do not make it that everyone pays and everyone gets, you do not have social or secured. host: you all sowrite what to do about all this. but the section of what not to do. you say do not depend on taxing the rich. tell us more about your not to do list. guest: it is to not decide that the 12% of the population make a lot of money and we should just take it and pay for it. that will not work because even though they are 12%, if you do this, it has a disproportionate influence in the world. i write about these people all the time. that would not work out. there is another thing horrified ,means testing. if you have more than a certain amount of income or what you just do not get social security. you do that and you're turning it into welfare from an earned benefit. for someone like me, i am well- off, and if i had the income that i have also the east coast might be demonstrably rich. 25% of my benefit goes back to social security through income tax. so you are already means testing me. anyone who makes any significant income other than social security -- so, i would keep it social and for a room. if you want to tax a little more, that is fine. if you want to raise some limits, that is finding a but to say that we will get "the rich" whatever that means, that is the end of the program. host: we have time for a couple more programs. baltimore is up next, our republic caller. ray. caller: [laughter] the only thing i have to say -- can you hear me? when you put up the numbers for everybody, the republicans should be on top since this is august. democrats are on top. for host: thank you for that. caller: i hope that i can get it. i'm 56 years old and chances are that i will not be able to get it. host: let's move on to washington with robert on the line for democrats. you are on the line with allan sloan. caller: good morning. i called to agree with the one lady who called earlier about becoming aware of the fact that it appears as though we have a definite class war going on in the united states. i have just become aware within the last -- i'm 65 now -- and the last maybe four or five years watching the elections how our politics work. it is almost frightening how if you become aware of it, what we are dealing with how divided classes are. and you talk about the issues, there is a very definite divide betweenclasses and their perceptions of needs. i will listen for your answer. host: any response? guest: yes, it has gotten more severe than it has been. but there has always been -- i do not like the word were fair, because it means you are out trying to kill people. -- i do not warfare which means your tried to kill or destroy people these are class differences, but not everyone acts the same with this and eachclass. if you read my article in see that i'm making more than $107,000 per year, theoretically i am rich and i should be with the people defending whatever, and i'm not. you'd be surprised to see how different people the. a lot of lower middle class people have economic values that are the values of the upper classes. it is all very interesting, but i agree that the divisions have gotten bigger over the years. but i do not think that it is warfare. i think it is just the normal give and take you love, maybe more extreme than usual by little. host: one last call for our guest from arizona on the independent line. caller: good morning. in the st. petersburg, florida newspaper some time ago which are read on the internet, there was a thing about getting jobs for people which were paying $1 million. why don't they use some stimulus money and give the people from, that are on social security, why don't they give them a lump-sum? it would give them time to build up. i'm not sure what a good amount would be. $250,000 is what you are supposed to put away. instead of monthly payments, give them starting at 60 or 65 $500,000? for people going on to social security? they will get money anyway. it is not like they are getting a gift. they have earned it and work hard for it. host: your final thoughts on the future of social security? guest: if for once we get together in washington and in the rest of the country and act like grown-ups and look at the numbers and stop complaining and operating our grievances, both the upper class who claim they are being ripped off and the lower class who say that rich have all the money -- if we get together and act social we will have a chance to be socially secure. so that my children in their 30's know that we will have this. we would be good for another two generations. after that, we will see. host: allan sloan market for over-the-counter derivatives, hedge funds, andç providencprie investment pools. we also examined the authority they had, such as our hearing in march that uncovered effective risk-management systems at major institutions. but although regulators played a critical role in policing the markets, there will always struggle to keep up with evolving and cutting edge industry. today's hearing will examine how we can better and our shareholders to hold corporate boards accountable for their actions and make sure that executive pay and other incentives are used to help companies better focus on long- term performance goals over day- to-day profits. in this latter regard, this is a timely hearing based on the action yesterday in the house financial services committee. wall street executives who pursued reckless products and activities they did not understand, brought our financial system to this crisis. many of the boards that were supposed to look out for shareholders' interests failed at their most basic of jobs. this hearing will help determine where the corporate governance said -- corporate governance structure is strong, where it needs improvement and where the federal government to play a role in this effort. i will ask the witness is what the financial crisis has revealed about current laws and regulations surrounding corporate governance, including executive compensation, board composition, election of directors, and other rules and risk-management. in particular, we will discuss proposals to improve the quality of the boards by increasing shareholder input into board membership and requiring the election of and the majority for the -- majority voting for each board. we will also discuss shareholder endorsement of the executive compensation. we need to find ways to help public companies align their pot -- their compensation practices with long-term shareholder value and for financial institutions to put overall safety and soundness firmly. we also need to make sure the committee members towho play key roles are appropriate. other key roles require other companies to create risk management committees on the boards and separate these -- the ceo and chairman positions to make sure that the ceo was held accountable by the board and an independent chair. i hope the board will allow these proposals and take the needed steps to allow the interest of shareholders. i welcome today's witnesses and look forward to the testimony. let me recognize the senator. >> thank you, mr. chairman. times are a little bit late. -- i am sorry i am a little bit late. this is a very important topic for us. but a hard one to deal with. while we may be able to make some reforms that would promote good, long-term performance irresponsible behavior, we will not, i say, be able to prevent bad decisions or failures. after all, we cannot legislate good judgment or ethics. and we already have the ultimate form of accountability through bankrupt -- through bankruptcy. in general, pay should promote good, long-term performance and shareholders must share in the game, not just executives and traders. traders. boards must be more@@@@@@@ @ @ put handcuffs on other businesses that have different needs and challenges. corporate law for the first 230 + years of this country has been handled pretty well at the state level and if we're willing to change that, we should be sure of what we're doing. i am sure looking forward to hearing what our panel has to say. thank you. >> thank you, very much, senator. senator corcoran? you have any opening statement? >> as always, i prefer to litton -- listen to the witnesses and ask questions. but thank you for all been here. ç>> senator schumer has taken a leadership role on this issue of corporate governance. it was senator schumer's suggestion that we hold this hearing, want to recognize him for any comment that he might have. >> thank you, senator reid. let me profess might gratitude to you for holding this hearing and for a ranking member on in being here as well a-- and for the ranking member being here on such an important subject. you introduce the said -- the bill of rights but senator cantwell earlier this year. the bill was supported by consumer groups, labor unions, and just yesterday the house financial services committee passed a say on page bill similar to the say on pay we have in the shareholder bill of rights. i'm glad to say congress is moving forward on this process and today's hearing is an opportunity to explore these issues in more detail. in the last year or more, we have talked a great deal about the failures of government oversight and regulation in the system. but our dynamic economy and capital markets also depend on internal oversight by vigilant boards to ensure that management is touring in the right direction. unfortunately, there are far too many cases recently were boards of directors, not just regulators, were asleep -- were asleep at the wheel. or were implicit in practices that were harmful for our economy and should capital markets. risk-taking that they did not understand and was not checked by their boards. compensation packages that were awarded short-term actions, but not long-term thinking. there were not undone by their boards. fundamentally, too many boards neglected their most important job, prioritizing the long-term health of their firms and shareholders and carefully overseeing management. in other words, there was widespread failure of corporate governance that has proven disastrous not just for individual businesses, but for the economy as a whole. and there are many in this room on both sides of the aisle to say that the government cannot get involved in the details of what a company does. and that is right. that is our free-market system. but the place that they are so -- that there is supposed to be a check is in the board of directors. when over the years, into the companies -- there are many companies that have good boards and many companies that already have implemented many, if not all, the reforms in our bill. but in too many companies, the board's did not do the job and the damage -- what of the board of aig had checked some of its actions, what if the board of bear stearns had checked some of its actions? the taxpayers probably would have saved hundreds of billions of dollars. it affects all of us, not just the and journals of the company. senator kent will introduce our builill and it makes shareholdes accountable. it goes a long way to make sure that this does not happen again. as everyone knows there are six key components in our bill. i'm not going to read them. several elements of the bill have already been put in place by corporations, and that is important to remember. for many corporations, these are already best practices. well-run companies do not fear the shareholders because they recognize that boards, management and shareholders share the same interest, long- term growth and profitability. the greatest damage appeared -- occurs not when boards are to active, but when they are not active enough. i think the shareholder bill of rights will go a long way to ensuring that companies are responsive to the shareholders' interest. i thank you and congratulate you, chairman reed, for putting together an excellent panel. i look forward to hearing the testimony of the witnesses, and ask that my entire statement be put in the record. courts without objection, all statements will be put in the record. >> mr. chairman, this is an unusual request, i do not know what those six elements are. and i think, since it sounds like -- >> since you ask. >> since this hearing has a lot to do with the fact that the bill is being introduced, it might be good for all of us to know what those six are. >> me i read them? >> asselin. this is unusual >> usually, you do not need encouragement. [laughter] >> for the record, no, i usually do not like to hear any opening comments, but in this case, yes. >> well, thank you. i was going to say, similar to what jack reed said, this is the first time that someone has asked chuck schumer to say more on the subject and he has said. [laughter] here they are. first, we requireç all public " -- public companies hold an advisory note on cheryl compensation and obtain shareholder approval for golden parachutes. second, we answered the sec to issue rules allowing long-term shareholders with a significant stakes in the company to have access to the company's proxy form if they want to nominate directors to the board. if you are going to try to keep the board on this, you ought to have access to proxy spirit is now almost next to impossible for people to get. third, require a majority of the vote in uncontested elections to remain on the board. it makes no sense for board members to be reelected if the majority of shareholders casting ballots voted against them. fourth, it eliminates a staggered board, which eliminates board members from the consequences of their decisions by requiring all directors to face election annually. fifth, requires public companies to split the jobs of ceo and chairman of the board and requires the chairman to be an independent director. that one has gotten the most push back from the corporate world. that surprised me, but that is the facts. and six, it requires that public companies create a separate risk committee requiring all independent directors to assess the risk that the company is undertaking. thank you, mr. chairman and senator. >> we have been joined by senator warner. you have any open -- opening comments? >> have i missed testimony already? >> no, you have not. >> i am anxiously awaiting testimony. >> our first witness is ms. meredith be crossed, the director of the division of corporate finance at the u.s. securities and exchange commission. prior to join the staff in 2009, ms. cross was a partner at cutler, pickering, hale and dorr in washington d.c. where she consult with clients on a full range of issues faced by public and private companies, raising and financial reporting. prior to returning there, she worked at the sec from 1990 to 1998 in various capacities, including chief counsel and deputy director of the division she now leads. our next witness is professor john coates. he is the hogan jr. professor at harvard law school. he joined the faculty in 1997 after practicing at the new york law firm wachtell lipton trud. he is a member of the advisor committee and in york stock exchange and he has suffered numerous articles on corporate securities and financial institutions. and for seven years he co- authored the leading annual survey of development financial institution, m & a. our next witness is miss ann youerger. she joined in joscelyn in 1996 as the director of the council's research service before being named executive director in january 2005. her prior experiences include work of the investor responsibility research center and wachovia bank. our next witness is mr. john j. castellani. he is the president of the business roundtable and chief executive offices of the u.s. companies. he joined the business roundtable in may, 2001, and has led the group's efforts on public policy issues. prior to becoming president of the business roundtable, mr. castellani was executive vice president [unintelligible] our next witness is mr. j. w. barrett. he is a professor at jersey school of law. he has written extensively on topics and prior to joining the faculty mason law school, he was an associate in the essence -- sec enforcement defense practice group in washington d.c.. he also served as a law clerk for vice chancellor john noble of the delaware court of chancellery. our final result -- witness is richard ferlauto at the american federation of state county and municipal employees where he is responsible for representing public employee interest and public retirement and benefit systems. mr. ferlauto is also the chairman of shareholders.org, a nonprofit gerald orla and education organization. prior to that, he was the managing directorç of a company that provides proxy by three services. -- proxy advisory services. i appreciate all of your appearances here today and let me recognize mr. cross. >> good afternoon, chairman reed, ranking member and members of the subcommittee. my name is meredith cross and i am with the sec. i just rejoined the sec staff in june of this year after 10 years of private practice here in washington. i worked as easy for most of the 1990's and i'm delighted to be back at the agency at this critical time in the regulation of the financial markets. i am pleased to testify on behalf of the commission today on the topic of of corporate governance and agencies on going effort to make sure investors have the information they need to make informed voting and investment decisions. corporate governance is essential to investor confidence in the markets and cannot exist without transparency. that is, time and distance -- and complete disclosure of material and information. it responded to the market crisis and erosion of investor confidence, the commission has the identified and taken steps in the past months in a number of significant areas for the commission believes enhanced disclosure standards and other rule changes may help to address the concerns of the investing public. two months ago, the commission voted to approve proposals designed to help shareholders more effectively exercise their state right to nominate directors. under the proposals, shareholders who otherwise have the right to nominate directors at a shareholder meeting would under certain to -- certain conditions be able to include a limited number of nominees in the proxy that are sent to all shareholders whose votes are being solicited. share holders also would have an expanded ability to include company proxy materials, cheryl addresses and other important topics. in addition, to enhance the disclosure that is provided to shareholders a key document in shareholders decisions on the election of directors. under the proposals, shareholders would receive expanded information about the qualifications of directors and director candidates, the board's leadership structure, and roll and mismanagement, and potential conflicts of interest consultation consultants. in addition, disclosure concerning the companies bought -- compensation policies and whether they create incentives for employees to act in a way that creates risks that are not aligned with the company's objectives. the proposal would also include the reporting of the annual stock option weren't -- awards to the company directors and require quicker reporting a shareholder vote results. the commission also recently proposed amendments to the proxy rules to clarify the requirements consistent with the emergency economic stabilization act of 2009 for a say on pay vote of public companies that have received and not repaid financial assistance under the tarp and improved changes to the nyse rules to improve -- to approve brokers on as they have received specific voting instructions from their customers. finally, the commission has asked the staff to undertake this yeaa@@@@@@@v@ @ @ @ @ @ @ # the committee who are here. i appreciate the argentine to talk about corporate governance. good corporate governance is an essential foundation to economic growth. this cannot be more -- this could not be a more important time for the congress to be focusing on it. there are large number of reforms, 6 and senator schirmers bill alone, and many others that we could talk about. i'm happy to talk about a few that you have questions about or want to explore. but before we talk about specifics, let me make two general remarks. that i think should be kept in mind in thinking about any particular reform. first, and it maybe a little controversy all, i think is fair to say that the academic perspective in corporate covenants would view of financial firms different than other types of corporations. not in a straightforward way that you might think, that isço say, shareholders of financial firms want financial firms to take risk and they want them to take more risk than may be appropriate from the perspective of the taxpayer. that is because many of the large financial institutions are, as we have learned, too big, too complex to fail. from the shareholder's perspective, if things go well with the risk that the company's stake, they are in the upswing and if things go badly, then in the end, it is the taxpayer who helps defray the cost to the shareholder. as a result of that, i do not think that it would be a good idea to give shareholders considerably more power in the governance of large financial institutions. if anything, financial regulators should be given more authority to check the power of the shareholders, at least on particular issues. compensation being one of them. the compensation structures and incentives that shareholders -- even if the boards are doing exactly the right thing for shareholders -- venture augurs what of large banks are not the ones that -- that shareholders want of large banks are not the ones that are going to be the safest for the american public. that is the first general remark. second, across the border on this, i think is fair to say that academic, scientific research is generally quite weak. it is evolving. there's almost no non-sproat -- there's almost no non-trivial issue here. that cautions against passing rules that are fixed, mandatory, or hard to change over time. instead, it cautions for giving shareholders the ability to adopt rules for their own companies, facilitating collective action by them. and that is an import role but i think regulation can play. shareholders of public companies are dispersed, cannot easily act on their own, and often faced entrenched board tomorrow -- unwilling to make changes when they are -- who are unwilling to make changes when they are, in fact, best for the company. weakside to the evidence is also not a reason to do nothing. what i'd -- week scientific evidence is also not a reason to do nothing. what i just said, they have a hard time acting for themselves, and the other general concern is the corporate governance in the last 10-20 years has not performed terribly well in a large number of companies. there is need for change and a need for carefully considered moderate reforms of the kind that can be revised overtime as learning on this subject rose. let me say quickly, the evidence that we do have, the say and say, is a good idea. i have to expand beyond that. i would say, for large companies, splitting ceo from chairman has some evidence behind that is a a a good thing. smaller companies, i'm not so sure that the evidence is there. but as long as the sec has given authority to tailor any legislation in this area, that would be a good thing to pursue. the staggered board, the evidence, if anything, runs against supporting that. there is an option on the one hand a fully condensable corporate -- a contest of all corporate structure there are elected every year and they're essentially the insiders have complete control, as in the case of google, which is a reasonably successful company. in between, the boards have proved to be the type that investors and new ipos have been willing to put their money behind and to ban them across the board is not supportive of the evidence, at this point. frankly, there is new evidence. that is a reason to proceed, but cautiously. to proceed through the sec and i think the sec already has adequate authority to pursue this topic, but the one thing that congress probably could clarify is exactly what the authority in this area is and i think that would be a good thing. with that, thank you. >> thank you, professor coats. mr. yerger? >> thank you for the opportunity to address the council. by way of introduction, council members are responsible for safeguarding assets used to fund a retirement of millions of individuals dropped united states. there capitalists. they are responsible for an aggregate portfolio north of somewhere $3 trillion in assets. they have a commitment to the domestic market, on average, investing about 60% of their portfolios in stocks and bonds of u.s. public companies. . . far too many boards approved a programs that motivated excessive risk and a huge awards for short-term results. corporate governance rules also failed by denying shareholders the most basic right to hold or directors accountable. first, congress should mandate majority boating's -- buddy. -- of voting. the director is elected even if the majority of shares are withheld from the nominee. the corporate law community is taking baby steps and some companies have to take new steps to adopt majority betting. but while many have, plurality betting still dominates at small and medium sized companies. -- plurality of voting still dominates at small and medium- sized companies. congress must legislate this basic share holder right. second, congress should palm great roles allowing nominees to be on a proxy card. this would substantially contribute to the help of our u.s. government modeled by making boards more responsive to shareholders and more thoughtful about who they nominate and more vigilant about oversight. the council commence the sec for the leadership on this important reform but unfortunately the sec may face a costly -- unnecessarily costly. the council recommends congressional loss. you should support the-- a companies should motivate and attract the highest executives. their reward go for broke, short-term performance that can hurt the company's long term. the council believes that pay issues are best addressed by requiring companies to provide full disclosure, making sure that directors can be held accountable, giving shareholders oversight of executive pay, and requiring revealing of this bridget as cotton gained. we stipulate that these are not routine. fourth, congress should mandate that all corporate boards be chaired by an independent director. we believe separating this provides a better balance of power between ceo and board and take strong leadership. in closing, empirical evidence from around the globe supports these reforms. the experiences in other countries and where applicable here in united states are powerful evidence that they are not harmful to the markets. these measures do not reward short-term. they are tools to enable owners to think and act over the long term. we thank you for your consideration of these issues. >> good afternoon. members of the committee, i am the president of the business roundtable. this is round table is at the forefront of efforts to improve corporate governance. we have been issuing press practice statements in this area for more than three decades. all the best practice statements are driven by one principle -- to further the u.s. company's ability to increase shareholder value that improve the well- being of all americans. at the outset, i must respectfully take issue with the premise that the most significant cause of the current and a crisis was problems in corporate governance. the financial crisis likely stem from a variety of complex factors, including failures to the regulatory system, a real estate bubble, as well as failures in risk-management. recently established inquiry commissions are to starting their work. any attempt to make policy in response to the reported causes would seem premature. in fact, to do so could exacerbate factors that may have contributed to the crisis such as the emphasis on short-term gains at the expense of long- term sustainable growth. moreover the problem of giving rise to the and enterprises occurred to a specific hour -- area of companies. it is applicable all 12,000 publicly traded companies, that does not make much sense. this approach fails to consider a number of factors that iraq would like to spend the remainder of my time discussing. first, there has been a sweeping transformation in corporate governance practices in the past six years. many of them have been proactively adopted by companies. for example, the average board increased 69% in 2003 to 78% in 2008. that same group companies that have a separate chairman in the board increased from 30% to 46% in 2008. many companies have appointed an independent lead or presiding directors who also presides over executive diskette -- executive sessions. companies have adopted majority voting, more than 7% of the s&p 500 have done so and many companies have moved to the annual election of directors. second, applying the single one size fits all too corporate governance regardless of other circumstances simply will not work. while there is a multitude of guidance about best practices in corporate governance, each company must periodically assess the practices that will best enable it to operate most effectively to create long-term shareholder value. in this regard we share the concern recently expressed by the new in tears me -- the new jersey investment counsel in a letter to chairmanship europe that it is "troubled by the proliferation of rigid prescriptive responses which are costly, time-consuming, and unresponsive to individual facts surrounding industries, and which may correlate all randomly to the creator -- a creation of shareholder value." third, for more than 200 years corporate state law has been the bedrock on which the modern business has been created and thrived. it remains most appropriate for corporate governance. in large part this stems from the flexibility from its enabling nature and its responsiveness in adjusting to current developments. the amendments to delaware and other state laws of the past years have facilitated majority voting and the very recent amendments in delaware law to facilitate proxy access and proxy reimbursement bylaws are an example of this responsive ness and flexibility. fourth, to the extent that shareholders desired change in the corporate governance, many avenues are available to make their views known and for companies to respond. for example, shareholders may seek have the proposals included in stock -- in a company proxy statements. many companies have responded to these proposals by adopting significant corporate governance changes, including majority voting for directors, a special meeting called by shareholders,n inane -- are aimed at improving disclosure about director experience, oversight and risk- management, executive compensation, and potential conflicts of interest with compensation consultants. the roundtable generally supports this. another controversial sec proposal seeks to amend proxy rules to permit shareholders to nominate directors. we have serious concerns that this proposal, sharing them with the sec in our columns. but we believe that the adoption of this proposal could promote short-termism, and lead to the election of special interest directors, increase the use of proxy advisory services, and highlight butter integrity problems in the system. let me emphasize the roundtable's commitment to effective governance practices and enabling jobs and economic growth. we must be careful that in his zeal to address our current financial crisis, we do not adopt a one-size-fits-all approach to it and undermine the stability of the boards of directors and paste companies under even greater pressure for short-term performance. we must be cautious that we do not jeopardize the ad -- the engine of american wealth and prosperity. >> ranking member ponding, distinguished members of the committee, i appreciate the opportunity to testify. i teach corporate law at george mason law school. i am a senior scholar with a working group and i also run a corporate federalism issue, a network of scholars dedicated to studying the intersection of corporate governance. i will begin by addressing proxy access and executive compensation rules under consideration. neither of these addressed the present financial crisis, and both may result in significant unintended consequences. then i will close with a list of factors that did contribute to the present financial crisis. i am concerned that some of the corporate governance proposals recently advanced impedes shareholder voice in corporate elections. does it because they leave no room for investors to design corporate governance structure is appropriate for their particular circumstances and particular companies. rather than expanding shareholder choice, a proxy reform before this committee actually stand in the way of stair hall -- a shareholder choice. most importantly, they do not permit a majority of shareholders to reject the approach. the director of the united brotherhood of carpenters said itest. up in what we think less is more, fewer votes and less often would allow us to put more resources toward intelligent analysis pratt the brotherhood of carpenters and oppose the current proposal out of concern about cost. the proposals issued today ignored their concerns as well as the concerns of many other investors. consider why you might limit shareholders from choosing an alternative means of shareholder access. it can only be because of a majority of shareholders that many companies might reject the federal approach if given the opportunity. they share the same goals. public pension funds run by state of special funds and union pension funds are among the most vocal proponents of the proposals before this committee. there are many examples where they had used their power toward their own special interest. main street investors deserve the right to determine whether they want the politics of unions and state pension funds to take place in their 401(k). they also envision more disclosure about compensation consultants. that would be incomplete without mentioning conflicts faced by proxy advisory firms, an issue that the current proposal spirit -- failed to address. also note that there is no issue -- evidence that executive compensation plan to roll in the current crisis. if it were to blame, we would see significant difference between compensation policies that as companies that recently returned their tarp money and those who needed additional capital. we did not. the proposals also seek to undermine and take legislative credit for efforts currently under way at the state level and in negotiations between investors and boards. this is true in proxy access, a subject of recent rulemaking at the state level, and it is true for the federal proposals on boards which are already voting in independent chairman. we've run this experiment before. the act passed in 2002 was a shift in corporate governance is designed to prevent poor corporate governance. between 2002 and 2008, the managerial decisions late into the current crisis were in full swing. this suggests that corporate governance reform at federal level does a poor job of preventing prices. and yet the financial crisis of 2008 must have a cause. i commend this committee's determination to uncovered. but i challenge whether corporate governance is the culprit. let me suggest six alternative factors for this committee to investigate. the moral hazard problems created by the prospect of government bailout. the market distortions caught by subsidizing the housing market for fannie mae, freddie mac, and federal tax policy. regulatory failure by the banking regulating and the sec and setting appropriate risk- based capital requirements for investment in banks. short-term thinking on wall street bid by institutional fixation on firms making and meeting quarterly earnings predictions. but that you're up credit rating agencies to provide meaningful analysis calls by an oligopoly in the credit rating market supported by regulations. excessive writedowns in asset values under mark to market accounting, demanded by accounting firms to refuse to sign off on balance sheets out of concern about exposure to excessive litigation risks. corporate governance is the foundation of american capital markets. shifting that foundations requires deliberation and the respective role of states and federal governments. it could have devastating affects for capital markets. thank you for the opportunity to testify and i looked toward answering your questions. >> that you very much, mr. professor. >> turn the microphone on. good afternoon, chairman read in many in -- members of the committee. i am the director of corporate governance and pension investment for the public employee union. we have long-term abiding interest in the help of the capital markets. our members are invested for public pension systems with assets over $1 trillion. they depend on those assets for long-term retirement security. does public pension systems have time horizons of 20-30 years in which they need to pay out our member benefits so that we are the -- we are a long time, long- term investor with those types of time horizons. i might also mention that we worked with aig overprice iraq because we understand that the board did not do the rest disclosure that we thought was necessary. i am also chairman of shareholders.org, designed to give voice to retell shareholders to buy opportunities to communicate regulators, policy makers, and companies in which they are investing. i'm here to urge your focus on corporate governance. we believe that that reform is essential to good performing capital markets. in fact, we could avoided some of the $11 trillion in asset loss that was faced and dealt dearly by our members and certainly by the u.s. household. a curtain -- according to a recent public opinion survey by opinion research corp., conducted for shareowners, investors want to see congress take strong action to fix financial markets and to clean up wall street. such action is essential in order for you to rebuild confidence in the markets. capital markets will not work without investors. investors will not come back if they do not have confidence that the markets are running appropriately. support for such action is strong across all age and educational background and a political affiliation. 34% and investors that we surveyed use the term angry to describe their views. the number one reason of loss of investor confidence in the market, we found, were overpaid ceos and unresponsive management and boards, at 81%. 61% of investors said that strong federal action would help restore their confidence in the fairness of the markets. when we carry them about policy preferences, the survey found that four out of five american investors agreed that shareholders should be permitted to be actively involved in ceo pay, 82% agreed that shareholders should have the ability to nominate and elect directors, and 87% of investors will lose their retirement savings to fraud and abuse should have the right to go recalling that money. fully consistent with these findings, we think that the committee should focus on fixing corporate governance. u.s. focus on the directors and the responsibility between asset owners and their agents, directors on corporate boards, the most critical change being creation of a proxy access rights so that shareholders, particularly long-term shareholder, the most patient capital in the market, so that they can nominate candidates for election to boards. we are very encouraged that the sec is in the process of rulemaking on this issue. we also believe that this is such an important right that it should not become a political football for a future commission. there needs to be long-term consistency and securities laws, and the exchange act is the appropriate place to clearly codified the authority that the commission has to require disclosure of nominees running for board seats. proxy access is fundamental to free and fair election for directors. second, shareholders should have the right to say on page, and a vote on the appropriateness of ceo compensation. we are excited that we saw the vote in the house the other day. we expect to see a full but this week and we think it is absolutely essential that broker votes not be included in the total. i changed to 452, excluding brokerage votes, would be a tremendous enhancement on the senate side. i can make other comments, but let me wrong about -- let me say that i thank you for the ability to testify today appeared rebuilding investor confidence in the market depends on what the policy makers that expand investor rights and authorizes the sec to strengthen his advocacy role on behalf of all americans and their financial security. i would be happy to answer any questions. >> thank you very much. let's do a six minute initial round with the intention of doing a second round. so we can quickly get to ask a question. the extraordinarily fortunate victor testimony, collectively and individually, has and has this debate significantly. what the issues here that had been alerted to by the professor and others? the interactions in this sick -- sec and the state, primarily in delaware, says they have 72% of public corporations. can you comment on this? i think i noted in your proposed rules that they are subject to the state corporate law. >> at that is correct. under the access proposal, you have a right of access to include nominates and not as easy-file proxy only if you have a state law right to nominate directors. we start with the state law, and then we enables shareholders to exercise their state law rights through the federal proxy rules. >> that raises the issue -- says the proxy rules are several wells and are not required by any states, i do not think, i think this is a principal issue between whether or not there should be the ability of the sec to require these rules, even at the state does not. is that something that you cannot do now under present law or you choose not to do? >> that is a question. under state law now, the recent changes in delaware@@@@@@@ @ @' vote under state law to have relax standards so that more shareholders to do so. >> professor, your comments? >> mr. chairman, i would only offer that the sec proposal does include reticence to state law. but the sec proposal says that you can adopt a bylaw that would describe how proxy access would work, only if it complies with the sec mandate. it is very clear on that. it runs roughshod over state corporation law determining election rights. it is expressly -- you might find reference and to state laws but the references made clear that the sec determines how proxy access is going to work. you can certainly make up your own rules, only if they comply completely with the sec rules on this essentially state corporate law matter. >> if there are state corporate laws, i think you recognize that the proxy process is a result primarily a federal law. the oilers the proxy process, sure. he was intended about issues of disclosure. i would offer up " from justice powell, no principle of corporate law is more firmly established in a state's authority to regulate domestic corporations, including the voting rights of shareholders. voting rights of shareholders. justice ell, at least, is with me on . >> no, i would not say that. [laughter] but i like that one. >> you described -- you might comment on this issue, professor copes. -- coats. >> as i said in my opening remarks, if congress were not to act, the sec did adopt proxy access, someone will challenge the authority to do so. precisely along bowlines that the professor suggested. i think the challenge with lloyd because the proposal is about communication. and allows shareholders to exercise rights that they clearly do have under state law. the sec proposal would allow, contrary to what was suggested earlier, any state to change his lot and then the sec rules would not override that state decision. the proposal the way that i read it and i court would read it would not affect conflict with state law on this issue. >> let me follow up on one of the points she made in a statement. -- you made in your statement. there is a general assumption that shareholder participation was described with the enhanced performance of the company. he's a just and certain situations, financial institutions, that it that half of but worse impact. there seem to be three or four different decisions year. you can page said its, or you can reinvest and increase shareholder value, and the shareholders would be interested in dividends and maybe also long-term value, but less involved in compensation. that is a pilot to the question -- -- a prelude to the question. >> there is longstanding economic theory of about which there is a fair amount of evidence to suggest that a company's capital structure has conflicts between the shareholders entitled to all of sight beyond that its payments that the creditors are entitled to, and the creditors. because it insures -- a bank is fundamentally a creditor of a large banking institution. there is in fact going to be on many occasions a conflict of interest between shareholder interest in the interest of the taxpayer with the respect of insured depositary institutions. that is the fundamental conflict. to the extent that proposals go toward increasing shareholder power, that simply makes the bank regulators job at the behest of shareholders and boards were seeking to maximize share value, even if it is long term, so any effort in this area i submit should be accompanied by clear authority for the banking regulators to at least moderate the way that these things play out for banking institutions. >> thank you. my time is expired. we will do a second round. >> thank you, mr. chairman. professor, if we're going to make proxy access easier for shareholders, what restrictions would you recommend to make sure that the ss benefit, a majority of shareholders, and the long-term value of the company does not just benefit small groups of investors and lead to short-term profits? >> center bunning, the best route to make that assessment is the shareholders themselves. i would lead to the shareholders to determine how proxy access should work. in delaware and other codes, which forms the basis for other states, they are on the right track. when commissioner has offered a proposal to the sec to help buttress this development. it would permit access for shareholder election bylaws to the corporate. instead of saying that this is how the election should work, which said its shareholders should put forward by law to determine how the election should work. rather than choosing -- that people got to choose that way. >> you're not suggesting they go back to a constitutional convention. >> in at that, eradication of bylaws is like a constitutional convention for shareholders. that is an apt analogy. >> in your written testimony, you raise an interesting idea. rather than forcing a structure on all companies, is suggested and opt-out abovote for shareholders for some governance proposals. that idea could be applied to proxy access and advisory both procedures, instead of government deciding what rules will be. i want to know what each of you think of that approach, of a mandatory opt in or opt out vote every few years to decide certain matters. the start with you, professor coates, since you seem to express this idea. i like to hear your comments on it. >> thank you. obviously i like my idea. >> i hope so. >> to explain -- i do not think of it as necessary to prevent imposing government regulation. i don't think that is the intent of any of the proposals currently being debated. i think it would be a good idea to preserve flexibility in what sorts of corporate governance structure is companies are either required or induced to adopt. one to way to achieve that is to let shareholders -- get this is meant to be in the interest of shareholders, then we have shareholders every five years given the option of rejecting a particular idea on the ground that is too expensive, too cumbersome, or simply not after their company. i think that is a reasonable approach. the key point would be popped out. shareholders on their own, despite that 20 or 30 years organizations like the once led by miss yeager, a part-time getting people responsive. they spent 20 years since posse access has been proposed by institutional shareholders, and only now has it been taken seriously. i disagree with the business roundtable suggestion that portrait generally responsive to shareholder desires. start with a good role. >> thank you, sir. it is an interesting idea of and i think with respect to our proxy access proposal, but one that we have on the table right now, we include request for comment in our proposal about whether or not you should be able to opt out and have the shareholders choose a different access mechanism. we very much look forward to receiving comments on that. this is a proposal. >> how much more time to we have? >> on the proposal? dollars know, to make suggestions or to comment. >> the comment period runs to august 6373 >> thank you very much. miss yeager? >> i have a couple of observations. i am not all lawyers to come that this would that differ perspective. >> i am happy to hear that. >> the board of directors is the cornerstone of the corporate governance models. we need to elect and remove directors. the fact is that we do not have those tools here in the united states. and that is why we advocate majority voting and access to proxy. we think these are two principal role did they run all companies that all times. in terms of an opt-out idea, i don't see how it would be relevant to majority voting. i believe fundamentally it's a director is not in support of the majority of votes, but director should not stand on the board. a quick point on access. >> i only have 35 seconds. i have another question. this is for professor coates. another professor raised up interesting problem before this subcommittee. with derivatives, the voting rights of shares cannot be separated from the economic rights of the shares, setting of the situation with a person voting has no interest in the long-term health of the company. what can and should be done about that? take a shot at it, both of you. that is all right. >> the issue is a serious one. it has affected a number of companies in the past in a recent years. during the financial turmoil, because it allows of short-term speculators who have distinctly different interests. >> bacon had a negative interest. >> exactly. if the sec is given time to address the issue adequately, they already understand that this is a significant problems. there are no simple fixes that is, just like most problems. >> you have not made a suggestion. >> disclosure should start. that is where i would start. all this cluster of hedge fund positions. >> disclosure -- sunlight is the best disinfectant. that is part of the reason why i am opposed to the fcc's current proposal on proxy access through legislation. it goes beyond the central mission of full disclosure. >> thank you. senator schumer. >> i thank you for your testimony. how like to make two comments, you can comment in writing because i do not have a lot of time. professor, let the shareholders decide as miss yeager points out. shareholders do not decided yet. saying that we leave that up to the shareholders, whatever happens, happens. in to many instances they do not have the ability to decide. our rules will let them decide. whatever they say is what they want? not under these rules. you can respond in writing. to prof. coates, because they would be bailed out, they can have a different structure. as the shareholders of citigroup or a ided that they have done quite well because they let this go to far and were bailed out. buzz companies, by the time they are bailed out, their shares are worth very little. i do not think that they would have a different structure and i would argue that the recent history was under kutcher argument even further. -- would undercut your argument even further. because you might be brought out allies should take risks and that is fine for the shareholders? they're going to be wary of risk over the next five years. shares went way down. you can respond in writing to that one. that one. think that recent history bears out that hypothesis. ms. cross, the sec has proposed say on pay for tarp recipients but not other companies. if it is a good idea when that if it is a good idea when that government >> scherman shapiro has indicated that she supports say on pay for all public companies. we don't have authority to require public companies beyond the tarp program. we stand ready to implement it, if congress enacted. >> sir, you know to that some of the proposals in the shareholder bill of rights are already been adopted by member companies and would reflect the emerging consensus on best practices in governance. what are you so afraid of if this is the trend anyway? if this is the right thing to do, what is wrong with pushing those? i had a discussion with one of your members who said it, i am not -- and then he named his predecessor. he said, you don't have to legislate to me. i said i am not. you are a good ceo. what about your predecessor? my question is, doesn't the shareholder bill of rights create a competitive advantage to the companies that follow the best practices? roundtable, most of the comply with overwhelmingly with some of our proposals, and many comply with just about all of our proposals, why are they going so far for the allied air companies for new laws are needed most? >> many of the roundtable companies have adopted the pact -- a practice is in your proposal. >> you psyched out with pride. >-- you cite back with pride. >> those who have had made that best direction for their company. the issue that you cited in the separation of the chairman and chief executive officer, in some instances is it makes very good sense. particularly where it is a transition event. but in other circumstances, boards feel that it makes best sense to have both together but to protect against the downside, having of reciting director. the question is why require it? >> i cannot stay for a second round. 1/2 ask you another question. the one that got the most kickback and that i am open to listening to change on or proposals on is the ceo and the independent director. he noted that 75% of your member organizations, 7% of s&p 500 companies adopted majority voting and roughly half of but 500 s&p 500 now hold annual direct -- director elections. but he said the one-size-fits- all approach will not work. give us a good reason that a director who gets only one vote and annual meeting should be allowed to continue as a director. >> i can give you any good reason why any director who does not receive the majority vote of the shareholders should be seated unless it jeopardize the ability of that company to be able to operate and that board to operate. many companies to adopt a majority voting put in a safeguard for companies such that if they require that particular director -- the only directorate that has the financial expertise that is required and the audit committee with a directive that would have the compensation expertise and -- it that would force the company to be in noncompliance -- beyond >> take away that exception. any others? >> not as long as the board can function. >> legally i would offer that the earlier to succeed a quorum might lead to legal circumstances. it could be an event of default under the company's litigation. >> i am sure that we could deal with that reform in the interim until there was another election. my time is expired. >> to the center for new york, i appreciate you offering something to look at. i do want to observe the staggered board issue. it has not been universally said and we have a body on the other side of the capital but doesn't have staggered boards. sometimes things come out of there pretty hot. but the 90% tax on the aig bonuses. there is merit on that and i hope you might consider that met the evolving. i wanted to say one thing to professors coates. to say that the same people in a at today at the same people would encourage the risk is not a good assumption. those people sold out high and a possible wet behind -- i don't think you can make that assessment -- and those that were left behind, i don't think you can make that assessment. we talked off -- carl ichan on the fun. he is someone who grows -- cares a great deal about corporate governance. he is written about this and i would not rely our conversation. the whole issue of where companies are incorporated seems to be an issue that may be even bigger than anything like out today. i wonder if a couple of you might respond to that. obviously cos inc. states they give them many protections and keep shareholders from being able to make huge changes. i wonder professors, if you might both responded that. and anyone else who might have something to say. >> i am aware that mr. ichan hired a lawyer to write the n.c. -- north dakota business at. i am a bit biased. i think delaware is a very at effective place for regulating corporate governance dealing with the intelligence of their law clerks. but i would also offer that to some extent, some of what is behind some of this effort is short-term. it got us into this problem in the first place. cash out on dividends rather than investing in r&d, it can be very effective in the long-term growth. some time hedge funds strips companies answer -- that could survive of their assets. >> you're saying that you like some activism on behalf of shareholders but not too much. >> absolutely. i'm suspicion of his motives but some of his activism i am in favor of. >> it has been true for a long time that shareholders cannot force the reincorporation from one state to another. they need the board to go along with it. it has to be a joint decision. there is relatively movement -- a little movement between states once the initial state of corporation has been chosen. before they go public, that is the critical point. the fact did delaware has a 70% share of the market reflects well on delaware. that is a reasonably healthy sign that delaware is being responsive as best it can to balancing the interest of both shareholders and managers who have to run them. one thing i would know about delaware and as permissiveness is that it only passed that enabling legislation in the past year. it did in response to the threat of federal intervention coming from this body. i don't think that you should think about delaware acting on its own to help shareholders. i think you should think about all were acting in relationship to this body and things that you do which very much impacted. >> mr. castellano, i served on several public company boards. certainly not of the size of a i.t. or some of the other companies we have had troubles with. i don't that there is any question that boards in many cases -- not all, and years i am sure is not in this way -- into a social thing. you are on the board because the ceo of this company and the ceo of that company is on the board. it is a status thing in many cases. the ceo in many cases helps select to those board members are. most of the times they had their run fish to fry. they have companies that they are busy with. complex financial institutions, there is no way -- like no possible way -- that most possible for members really understand some of the risks that are taking place. with a limited number of board meetings, even if they are on the audit committee, it is very difficult to do. some of these things need to be addressed by governance issues that we might address here. hopefully not too many. some of them need to be addressed internally at the company. i know you advocated that in the office. but that issue of the culture, of the weight boards in many cases -- i wonder if you might have a comment there. and then after that, i am familiar with the company a makes investments in large companies. one of the rules that they have is that they don't allow the ceo of them sell to actually serve on the board. the report to the board, the iraq the meeting, but they don't allow them to serve on the board. i would love to you to respond to both of those inquiries. >> i thank you for your first question period which were flooding might be had been -- i had been the spirits that you served on. it doesn't reflect a tremendous changes that have occurred in the boardrooms over the last years. we now see boards of directors in the case of business roundtable companies, at least 80% independent. the directors are independent of the company management. indeed the government's committees are the nominating committee's by requirement of the listing standards in the sec, made up entirely of independent directors. the nomination of board members -- respect -- prospective board members is that control by the chief executive officer. and then thirdly, i would point out particularly the amount of time that is involved in the amount of expertise that is a ball. it is not only the specific requirement of the expertise in the standards and the sec requirements, but in deeds the boards themselves are demanding and the shareholders are demanding, not only greater expertise in specific areas but a tremendous increase in the amount of time. for example, i was recently talking to the chair of the audit committee of a large u.s. company. back chair spent 800 hours, his time, as the chair of an audit committee of the last year because of some very complex financial issues. the board members are spending more and more time. i would submit to you, sir, that things are different than when you served on the board. and in terms of the boards being able to have the ceo is a member of the board, the ceo as the member of the board and chairman is a very important nexus between the governments of a corporation and the management of the corporation. we have found and experience has shown over a long period of time that if you separate governments for management, you get precisely the kinds of problems that this committee is trying to avoid. adding the ceo on the board is a very important nexus, in many cases. companies' imports believe that having the ceo as chairman of the board is also very important. my point would be what i have said in my testimony. that is up to every company to decide and the board of directors represent in their shareholders to decide, rather than to be prescriptive. it is not always right but it is right for the company that makes the right decisions. they should be allowed to make that decision. >> sentiment does. >> thank you for your testimony. most of what i've understand, most of you said that you support the sec's may 20 role to allow certain shareholders to include their nominees on proxy. did you think that goes far enough? or is it too far? or is it too far? does that embody what we want to see? >> senator, i think it is an inappropriate use of rulemaking which is purely disclosure based, which is very important. it leaves up to the states the creation of rights in terms of the nomination of directors, but it empowers shareholders to be informed of shareholder communications about the fact that the elections are occurring and then vote through the proxy material on that right. i think that is a good balance. in addition, something we have not talked about, the rule goes further in that it empowers shareholders to make a binding bylaw amendments to improve those shareholder rights for the election directors so that the disclosure right at 1% or actually -- that they have and the disclosure system right now for comment becomes a floor exposure and then at the state level, through an election system based on a shareholder proposal or board proposal that can't tweak that right in an interesting way. for example, i spoke about share owners being interested in retail share owners. they cannot hope to get 1%. in the u.k. might be able to get 100 shareholders, resale shareholders each owning 05 thousand or $10,000 worth together, might be an appropriate group to create different types of rights. so that there is flexibility, which i think it's quite welcome. >> i think the proposal strikes a balance in limiting the ability of special interests to hijack the corporate balance. so i would offer that. >> anyone else have an opinion? >> senator, i was not one of the majority. i want to make sure of that. our concern is what the ftc is proposing to give access is wh preempting what has been done in the state. the asymmetry in the argument that says, if we trust the shareholders to elect the boards of directors, which we do implicitly, then we ought to question the shareholders to set the threshold at which shareholders can nominate those board of directors. -- we ought to trust that. >> we think this is a right that should defederalized. the states have failed investors for to long, delaware in particular. it only acted when it had to. it's important this board tak e control here. >> there are many cases where what is best for corporate management may not necessarily be the best for shareholders. r shareholders. there are also case that wh what is best for the general public or the financial institution as a whole. how do we reckon not -- cannot reconcile those things? >> it is a very interesting question that has been discussed -- i am the oldest on the panel so i can say it is been discussed for at least most of my corporate career. >> no one is objecting. you created compromise already. >> it was particularly unimportant topic in the 1980's when there was a lot of activity related to hostile takeovers. to whom is supported directors and management responsible? the answer was stakeholders, ultimately. they all had a legitimate position in the decision. i would think it is fair to say in the 1990's and the early part of this decade, that balance with more to the shareholders. what happened is that the nature of the shareholders has changed very considerably. the average holding period of a new york stock exchange-listed company is about 7.5 months. you're really dealing with share maintenance and traders as much if not more than shareholders. i think what we are all discussing here and all have a perspective on is going forward, what is the correct balance between those who have a very short-term interest in very quick gain out of a company, and they wanted to some of the things that have been discussed here? you get access and small rights -- in rights to small percentages of shareholders, you know how they will lack. we on 5% and we want you to leverage the company, buy back the shares, it gives a 20% jump, and we are out of here quickly. as opposed to other shareholders to think that what about you. -- that they want about you. i don't think anyone knows the right answer but that is the question that is at the crux of what we should be looking at. >> interesting a month, this is where the business roundtable and some members of your critics agree. it is how to empower long term as some -- long-termism said that the best interests of the company to achieve long terms shareholder value is achieved. the way that you do that in terms of long-termism is getting into the dna of the board. how does the board become most effective? by being the first, by being able to absorb many different points of view, by being able to evaluate its help and make sure that is focused on long-term, strategic implementation, and that ceo pay and sentence are aligned with the strategic vision? when we see a company that fails, we see of failure in all of those areas. which is bad for the shareholders, the employees, and that for management. and for all other stakeholders in the process. we want proxy access to fix the boards because they cannot sell to evaluate, they are not the person not to share the interest of these stakeholders which ultimately they need in order to achieve long-term shareholder value. . >> i want to commend senator warner and center corker for the test act. it goes down the road to deal with some of those unique concepts. >> thank you. >> mr. chairman, thank you. thank you for being here. what i am trying to figure out as i listen to this very interesting dialogue between the senators and each of you is this, i kind of look at this as maybe a little bit black-and- white. there are big players here and small players, but they are all affected by the decisions we make here. mr. ferlauta, how much money do you have invested? >> a rather small player. the pension system itself has less than a billion dollars in it, but we are concerned about the retirement security of our members. our members depend on well functioning capital markets and boards to achieve value. in north for them to pay the benefits, all of our members want a market that will succeed, that has the ability to achieve a value over time. we are not active on the part necessarily of what is in our portfolio, but what is in the interest of not only are members but all american families seeking to achieve long-term financial security. those are the people i speak on behalf of. >> i've never had a billion dollars under management. i see you as a big player. what if some institution out there who has a billion dollars underinvestment or $10 billion, let's say you decide that you think the worst possible course of action for company is to be pro-trade. there are some that very openly espoused that theory, that trade costs jobs and hurts america and the this and that. if you have access to the proxy, you then have the right to elect somebody who espouses that view. would that be correct? >> no, not necessarily. what we have the right to do is potentially nominate somebody, but in order for someone to be elected, it must be by a majority of everyone voting and then presumably all the owners have been a regular election would assert their choices based on what is in their self- interest. i would assume it a minority player working on any motivated self-interest would not be able to achieve victory. >> here is what i'm trying to get to. i am trying to be very direct about this. i have 100 shares. you have a billion dollars worth of shares. i am pro trade, let's say. whoever the institution is, i'm not saying yours, but whoever the institution is, takes a very different view than i do, it may not be in the best interest. >> what i'm concerned about are the large financial intermediaries, particularly mutual funds seeking to do business with other large companies to sell their investment products through their 401k plans so they may cast their votes in a way that may be looked kindly on by the ceo because they're not voting against his compensation plan, rather than voting in the interest of all the small individual investors who put their money into that fund, thinking that is the way to achieve a value. those are the kinds of conflicts in the system are concerned about. >> i will be direct again. you and i will have an easy time agreeing that there are a lot of ways to be self interested. a lot of ways. so it, mr. castellani, based on your corporate experience, what effect does that have on your company if there is ease of entry? >> one of the things we are concerned about is it would politicize the board. the board is legally required to represent all shareholders. each member of the board is to represent all shareholders, not a particular constituency of shareholders. but there are constituencies in shareholders, people who want short-term gains, people like my company owned newport news. we had a shareholder little group from connecticut, a group of nuns who owned $2,600 of the company. every year there would have bet on the proxy, what they wanted in shipbuilding. ththe shareholders pay for the proxy process. it does not come out of management's pocket or the government's pocket. the second, they pay for the proxy process. second, the board's best operate when they operate by consensus. when there is agreement among the board of the strategic direction of the company and wh o implement that strategic direction, it means -- it does not mean there is not discussion or questioning, that there is not dissension, but when they make a decision, companies operate best when they don't second-guess until there is reason to do so, the direction the company is going into. >> i walz pres that too much today because we have been given extra time. i wan-- i will not press that much. i was on a panel yesterday in this room. i said to the panelists, i will warn you that i am a former governor. it just astounds me how we have this philosophy here -- and i am very new to this -senate job -- it astounds me how we think all the best solutions are here in washington with a federal approach. this really does impact the states in a very significant way. that, in itself, is a very profound issue. yet we just kind of jump right in the mccullah of it with this new approach that just cast aside the 50 state corporate laws. i will share this with you. when i started as governor many years ago, i decided that i wanted to be a state that attracted business to my state. we needed jobs. we needed economic growth in the state of nebraska. i decided i was going to take on delaware. to try to make that happen. what i realized about delaware was they had a heck of a good start. they were doing more things right than they were doing wrong. it was going to be very difficult to put a dent in that. in this hearing, whether it is delaware or nebraska or wyoming or california or whoever, we have a very profound impact on the history of corporate governance in this nation. i just don't think we should do that lightly. i think you would have 50 governors in those seats back there ready to come to the table to chew on us about that, because it does have a very significant consequences for the states, where the jobs do exist, where the jobs are created, where hopefully the businesses grow and expand and create economic opportunities for the people out there to then pay the taxes that allow us to come here and do this and other programs would love to do. so i just think this is really an important philosophical issue. that is my little sermon. thank you. >> thank you, senator. what is the status of majority voting on delaware >> it's not the deepak standard, but the laws accommodate majority voting so companies can adopt this voluntarily. standard but the laws to accommodate majority voting so companies can adopted voluntarily. under the sec's proposal, that not affect the law. >> we don't have a proposal but if there were more people running and there were pieces, you would vote to corral the votinplurality voting. -- plurality the voting. under the present arrangement, the directors control access to most companies to the proxy. they decide to in most companies will get on as an issue and what will not. the current practice, unless we do something, will leave the directors with critical control of the process and on both sides of this argument, we're talking about empowering shareholders. >> i am a scientist and engineer and not a lawyer. >> ithe directors do not have control access to the proxy for all issues. in fact, the sec controls. companies get proposals to related to social issues, governance issues, economic issues, labor issues, environmental issues, but i don't think that is what you're talking about what you are talking about is the access for the purpose of nominating directors. any group of shareholders has an ability if they can afford it and it is an expensive proposition to nominate directors and run and competition to the directors who are nominated, that is how we do takeovers and that is how the company's make changes. we have by majority vote to come by and large, directors who are elected to represent all shareholders. those directors are by and large directed every year and dow. the shareholders can remove this by majority voting. how does it best operate? does it let the directors make decisions about who should be on the board or prison in the shareholders, who should manage the company? or, do we subject to them to a reelection challenge every year and turn them into corporate politicians. did they have to be more concerned because the nominee was directed because they did not want us to be in the nuclear shipbuilding business or they did not want us to do business in that particular part of the world or they wanted our product lines to change? what our concern is that boards should be free to do and responsible for doing what the shareholders want them to do and that is to be good stewards. >> whathe sec has discussed thin terms of social issues. there is a group of directors that essentially nominates the nominating committee and then they are chosen for their support of the status quo. in many times from the vote is not elected by a majority. there are many times were less than a majority even votes. most shareholders are reflecting on dividends, share value, what they think the company should be doing. >> good boards communicate well with shareholders and this is something that we do now. some people come in to discuss this and we listen to them. we want to convince investors that we are a good company to invest in. we listen to investors. sometimes in these discussions you are talking about individual investors. we have to be responsive to our largest investors. the desires of individuals come through intermediaries and the message is very different than what some of the things you're describing. >> this conversation could go on at length but i will stop and recognize senator bunning. >> thank you very much. there is been a lot of discussion on giving shareholders vote on the packages but little information on details. what should we vote on and how often should we vote? >> one thing i would drop out is that there is a big difference in say on pay and say in severance packages. i think it is a mistake to lump them together. the big difference is that severance packages are used to facilitate the efficient mergers and acquisitions. sometimes when a good mergers deal, the ceo of the target has to go. >> that is in my question. i would differentiate say on pay and severance. one of the details is how often would you approve say on pay. some groups prefer a look every three years. >> by the time the second your camera on coming to the company would be in chapter 11. >> perhaps but what they propose is that the pay packages are negotiated over longer terms. you don't is rarely read approved the pay package every year, sometimes there five or 10 years. i suggest you leave open to boards and shareholders to determine what they want. >> you think they should be left open to the board's. >> i worry about the effects of one-size-fits-all and a think we have seen this in britain with their say on pay rules. >> you think the negotiations on golden parachutes should be different completely. >> they should be, sometimes you have to do them very quickly, not enough time to get approval for the package. >> would you like to comment? >> this is advisory votes on me. -- only. the u.k., australia, the netherlands have done this. the evidence suggests that it almost never has a bad effect on companies. almost all the time shareholders approved the pay packages presented. there are a few all liars that get their packages voted down and the result is a better alignment of shareholder and management interests. -- there are a few outsiderlier. >> as states responding to concerns about corporate governance issues with changes to their own lawns, is there really in need to federalize business law? >> i would agree. we have not time to see the effect on state changes. after delaware facilitated majority voting, we saw an increase in majority voting for 20% of the s&p 500 to 50%. delaware just amended its code in march and they are about to change the model business code. there has not been on a lot of time to see the by loslaws. >> i believe that the problem here are the problem companies and that is why i think these issues should defederalized. >> they are at the trough every time they have a problem whether they are a finance company or an insurance company or an automobile company. if you think they are too big to fail, then the federal government is backstop. do you have some other suggestions that we might not have to be the backstop? >> regarding what specifically? >> about the law's being changed in the states on corporate governance. >> we have had plenty of experience and there are many companies, most small companies have not adopted it. we think this should defederalize. i believe that proxy access to defederalize. when council members invest in domestic companies, they are not doing a portfolio of delaware companies or nebraska companies, they are looking at u.s. companies. these are basic rights that we should be giving to any company. >> the fact that i lived in kentucky, you want me to come in and say the federal government should make the rules for every company in kentucky. >> regarding access and majority voting, yes, sir. >> another approach this is that you give shareholders the power to decide what state to incorporate in. >> they do have the power. >> no, they don't. one way to do this is to give them the right of every four or five@@@@@@@ @ @ @ they have a right to decide on whether the charter powers in a particular state are appropriate for them at a particular moment and let shareholders to decide on their own. >> you, as a billion dollar investor, a person who controls a billion dollars worth of investment, would say that to the shareholders after the fact? after they have already incorporated? >> i agree the state of incorporation should be a greater factor when ipos are made and it's not enough emphasis or focus on corporate governance during the ipo process. that could be something very interesting for the sec to look at for perhaps a new rule making. if you are talking about empowering the state's, one thing to consider is to give them real power and create real competition among delaware, neb., and north dakota and california and every other state, by making state corporations real and let them compete. you can make state corporation real and let them compete. the only way that you can do this is to give shareholders real power to make a decision about what laws are most of corporate to them. >> it won't sell, we cannot sell it. we would have 50 governors up here every day trying to tell us to mind our own business. thank you. >> thank you all for your testimony. and you can change the corporate domicile at any time you wish. could thshareholders are given e ability to influence things. i hope that this is something that we will understand. i am not sure if i understand enough to support it. i want to say to you that i think that you were dead on in your opening comments, here you are talking about lots of things but what has driven this is moral hazard and what happened andgse'swith gse's. credit rating agencies that did not do what everyone thought they were doing. i hope we don't go overboard with what we do here because it is many other factors that have created this. i think that boards are the final governance issue. if you have good boards that actually understand the risks, especially at financial institutions. we might actually look at differentiating things that have to do with large companies, financial companies, that offer system it risks, we might look at this differently. senator schuman is close to our chairman. knowing how things work around here, he may refer to him on some of these issues. he laid out six things. my sense is that the shareholders stay on pay issues was not a particularly controversial. >> why do it every year? >> maybe there is a size issue. i am not necessarily covagreeing with you. >> we believe it should be up to every board of directors and every company to decide what is best for them. >> is anyone else disagree? >> on behalf of the sec, i am not expressing views. my my silence, i am not commenting. >> we are believers and one- size-fits-all on this issue. >> i hope that this stays in place and is not eliminated. the majority voting issue did not seem to be a big issue to anyone. >> most of our members have majorities. >> this is the one issue that we have not touched on. since we have pretty good impact from you in these other areas, what are your thoughts? >> senator, i think that -- i don't know. the fundamental issue is whether or not a board of directors should regularly and thoroughly analyze the risks that face the company is not one in which there is any argument. that is one of the fundamental purposes of a board of directors. what senator schumer prescribes is not a portrait and this is that you create a separate committee to do that. some companies choose to do it within separate committees but other companies think it is better done with in its audit committee because its greatest risk might be in its financial structures. some companies do it because of the nature of the products in different committees because the greater risks might be the products or the markets in which they served as opposed to financial risk. our suggestion is that it is done but don't specify that you create another committee, particularly where we already have the risk of being so prescriptive to how many committees and what kind of committees and boards should have that we run the risk of being the best that government compliance and the worst that government implementation. >> is anyone that strongly disagrees with the position he just fourth put forthput forth? questions to be some very explicit disclosure about who is responsible for risk -- >> there needs to be some very explicit disclosure about who was responsible for risk, how they will review risks. >> he would moderate the bill in that way and specify that doesn't have to have a separate committee but to that function has to take place? >> cfiuif we could give sharehos the ability to raise to the top, i asked the question earlier, how do you feel about shareholders say that you will not be domiciled in every state that you are in but you will be in texas? >> if the majority of the shareholders want to change the logo to pink and make me stand on one leg, i do that. this is what the majority of shareholders want. this is not a decision that is based on the ability of ease a change of control. one of the reasons why delaware his very attractive to corporations is that delaware has an infrastructure that is very efficient in adjudicating on issues between companies and shareholders and shareholders and shareholders require annual meetings and whenever they need to be adjudicated. delaware is very very good. they have 10 judges and a couple of hundred staff people that make decisions quickly. it is not just the structure of along that is attractive but it is the ability of the state to implement this law when issues are in contention. >> by you are selling delaware, i am sure that the chambers like that. >> in new jersey is good, ohio is good. >> my guess is that some of those are not that you just mentioned. giving the shareholders the ability do that -- by law, you have no problem with that? >> yeah, i would. why prescribe for all shareholders something that they are the have the right to do? >> is anyone strongly disagree? >> currently shareholders do not have the right to force a reincorporation over the objection of the board. i think for once i am on the management side of this. i do not think that that would be a good idea to introduce, it would be more powerful and more destructive on behalf of shareholders than anything that the sec is proposing. >> you think that is a really bad idea? >> well, i think it would be a good thing. >> i associate myself with those remarks. i cannot imagine what the benefit would be compared to the cost of disruption. >> i think that is true. i think in moderata moderate fos discussing access. you should also great competition amongst the states. >> this is not an issue we have endorsed. i think this is a complex issue that i would be very surprised to the corporate community would support. >> i would also offer that the changes could introduced from time to time. >> while i asked a number of questions, i will give the same disclosure to the sec, none of them necessarily represent my point you. this is just the best way to understand what a very diverse panel of six people think about an issue and i very much appreciate all of your input today and i hope that if we do anything on corporate governance, i hope that it is modest and we realize that at the end of the day, many factors led to the failures that we have had today, much of which was generated out of this body and those who came before. i hope that we don't create another type of problem by over legislating how the private sector governs itself. thank you for your testimony. >> thank you. i want to thank all of the witnesses. this has been a very insightful panel. thank you for the time and effort you have put into this. it is quite obvious from the testimony and response to questions. the complete written testimony will become part of the record and we are happy to include supporting documentation. we ask that when this is response to any written questions that are set within two weeks and note that the record will close after six weeks. with that, i thank you and i thank my colleagues. the hearing is adjourned. 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