Barney Frank

Mr. FRANK of Massachusetts

Mr. FRANK of Massachusetts. Mr. Chairman, I move to strike the requisite number of words. The gentleman from Illinois has accurately described this, and I urge its support.

Mr. FRANK of Massachusetts. Mr. Chairman, I move to strike the requisite number of words to first thank the gentleman from Alabama for his kind remarks about the way we have been working together in committee. I would just say that I have too recently been in the minority to be abusive. I hope that will last. I certainly intend it to. I am told, by the way, by our Parliamentarian, who, as the gentleman knows, was the Parliamentarian when the other side was in the majority, we have already had more rollcalls in committee in this year than we have had in the previous congressional session. While we have been moving a lot of bills and we have been able to do it expeditiously, I think we've aired a lot of issues, on this particular case, members of the minority made this suggestion, and it is a plausible one. It improves the bill. I realize that they still don't like it, but I appreciate this constructive spirit, and so I urge adoption of the amendment.

Mr. FRANK of Massachusetts. Mr. Chairman, I would just say I also want to welcome this renewed faith that I have heard from my colleagues in the American corporate system. Recently corporate America and financial America has been lamenting how badly we regulate compared to England. We have heard from the Paulson Committee, so-called after the Secretary of the Treasury, we have heard from the Chamber of Commerce, we have heard from the McKinsey report that we should be more like England. I am glad now to have this affirmation that even with Sarbanes-Oxley that the Chamber of Commerce praises so loudly, even with the Securities and Exchange Commission apparently not being the FSA, the American system still works. That is a good counter to some of what we have heard lately.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield myself such time as I may consume. Mr. Chairman, I would just note in passing that I saw the letter from the Chamber of Commerce, and I was particularly struck that the Chamber of Commerce said we don't need this bill because Sarbanes-Oxley has been such a good law. Specifically, what they said was, Sarbanes-Oxley has yielded significantly stronger and more independent boards and compensation committees. So I think that the Chamber of Commerce's endorsement of the good results of Sarbanes-Oxley also ought to be made public here. Mr. Chairman, I yield my remaining time to the gentleman from North Carolina (Mr. Miller), a relatively senior Member. Not particularly the one I had in mind, but a very able and useful Member.

Mr. FRANK of Massachusetts. Mr. Chairman, I reserve the balance of my time.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield 4 minutes to the gentleman from New Jersey (Mr. Sires).

Mr. FRANK of Massachusetts. I understand that, but let me just give myself 30 seconds. Mr. Chairman, why didn't he file it as a separate bill? He had no interest in this that I could discover until we brought this bill up. The gentleman said he wanted to offer a nongermane amendment. Well, you are allowed to introduce bills. Introduce a bill. We will have a hearing. If the gentleman, let me tell my colleagues right now, if they want to introduce legislation expanding the right of shareholders to vote for members of the boards of directors, I will guarantee them a hearing. But the bill has not yet been introduced. Mr. Chairman, I yield 30 seconds to the gentleman from Georgia (Mr. Scott).

Mr. FRANK of Massachusetts. What do you mean you wished to offer? I will take back my time.

Mr. FRANK of Massachusetts. I yield to the gentleman from California.

Mr. FRANK of Massachusetts. Mr. Chairman, I would take 10 seconds to say that the gentleman from California mischaracterized his own amendment. No amendment he offered would expand shareholder rights. He did offer an amendment that said if there is a preexisting right to vote for the majority, then this bill does not apply. But no amendment he offered would expand existing shareholder rights.

Mr. FRANK of Massachusetts. And one is quite enough.

Mr. FRANK of Massachusetts. I am still in Massachusetts.

Mr. FRANK of Massachusetts. I am from Massachusetts, but I do want to report a theft, Mr. Chairman. Apparently someone has broken into our committee office and stolen a whole series of bills that the other side had to deal with all these other things, because I am hearing now about all these other things we should be doing and these other things that we should be addressing, and I haven't seen any of them. So I want to say to people, unfortunately, all these wonderful ideas that you previously had, and I wouldn't suggest that you are only saying them now as an excuse to beat this bill, please send me copies, because somebody stole the ones you sent me.

Mr. FRANK of Massachusetts. Will the gentleman yield?

Mr. FRANK of Massachusetts. I would say to the gentleman, I am baffled by this. On the one hand, this is too intrusive, but the gentleman says a better way would be to require corporations to elect directors by a majority. That would be a far greater intrusion into all of the aspects of the corporation. But I will say this, if the gentleman prefers and the Members on the other side prefer: that we instead pass legislation that requires all corporations to allow a majority election for directors in an effective way as an alternative to nominations. Maybe we will hold off on this bill and consider it. I await that bill. The gentlemen on the other side are all full of other solutions, none of which have ever been put to paper. Mr. Chairman, I yield 6 minutes to the gentleman from Missouri (Mr. Cleaver) a member of the committee and a great ethical expert.

Mr. FRANK of Massachusetts. I was frankly waiting, and I was disappointed, but that happens a lot in life, for the gentleman to get to the part of the article that he quoted selectively in which that article says what you really want to do is make the tax system more progressive. I suppose the gentleman didn't want to quote criticism of tax cuts that he voted for, but it did seem to me, if we are going to be quoting things, Mr. Reich said not that he was opposed to this as a bad idea, but that a much better way to do it would be to undo the tax cuts that the gentleman from Delaware supported at the upper brackets. Mr. Chairman, I would ask to insert in the Record the article by Robert B. Reich. [From The American Prospect, April, 2007] Don't Count on Shareholders (Robert B. Reich) An acquaintance of mine sits on the board of a major company that just agreed to pay its CEO close to $10 million this year, including deferred compensation and stock options. I asked him how he and his board colleagues could possibly justify that kind of money. ``No choice,'' he said. ``That's what our competition is paying. It's the going rate.'' As Congress struggles to raise the minimum wage to $7.25 an hour, the going rate of CEO pay is now $5,000 an hour. Polls show most Americans think this is obscene. But how to rein in CEO pay? A growing consensus believes the best way is to give shareholders more voice. New Securities and Exchange Commission rules require companies to inform shareholders in greater detail what their companies are paying top executives. In recent months, shareholder activists have submitted proposals to 60 companies seeking input on CEO pay. House Democrats are now working on legislation that would give shareholders the right to have more say over pay. But the growing consensus is wrong: Shareholders won't constrain the growth of CEO pay, because most shareholders don't care about it. The vast majority own their shares through mutual funds and pension funds, and don't even know which companies they're invested in at any given moment. Their only concern is maximizing the return on their total portfolios. They keep the pressure on fund managers to do this by moving their savings from funds that underperform to those that show better overall results. Fund managers, for their part, don't care much about CEO pay, either. They're looking for companies whose share prices are rising, and they push firms to get their prices up by shifting capital out of those whose prices are lagging into those that show more promise. Presumably, shareholders and fund managers would want to constrain CEO pay if it hampered company performance, but it hasn't. While CEO pay has soared over the last 25 years, share prices have soared, too. Between 1980 and 2003, the average value of America's 500 largest companies rose by a factor of six, adjusted for inflation. What happened to average CEO pay in those companies? It rose roughly sixfold. Shareholders have no reason to complain. They don't--and they won't. Depending on shareholders to rein in CEO pay is like relying on gamblers to rein in the owners of Las Vegas casinos. Just look at Britain. Since 2003, changes in British securities law have given investors there more say over what British CEOs are paid. Nonetheless, executive pay in Britain has continued to skyrocket, and now just about matches that of American CEOs. Companies listed on the London Stock Exchange have done sufficiently well that British investors don't care what CEOs are paid. The real scandal of CEO pay has almost nothing to do with shareholders. It has to do with what's happened to the pay of most other workers as CEO pay has soared. Shareholder returns have kept up with CEO pay, but median wages have not. In 1980, the CEO of a major company took home about 40 times what the median worker earned; by 1990, that CEO's pay was about 100 times the median worker's; in 2006, it was close to 300 times what the median worker earned. (Last year, Wal-Mart's Lee Scott Jr. earned 900 times the pay of the average Wal-Mart worker.) CEO pay is part of a much larger problem: the growing portion of the nation's income that's going to a small number of people at the top. The pay packages of many denizens of Wall Street are even more outrageous than CEO pay--last year reaching $40 million for top traders and more than a billion dollars for top hedge-fund managers. The new stars of Wall Street are private equity funds that are buying public companies back from shareholders and raking in 20 percent to 25 percent annual returns for their private investors--mostly wealthy individuals with yearly incomes already in the stratosphere. Not since the robber-baron era have income and wealth been as concentrated as they are today. This doesn't threaten shareholders; after all, most shares are held by the wealthy. It threatens democracy, as the wealthy use their fortunes to bankroll politicians who tilt public policies in the direction of the wealthy--by, say, reducing their taxes and cutting public services for everyone else. It also threatens our economy, as more and more investment decisions are made by fewer and fewer people, and as the middle class loses its capacity to pay for the goods and services the economy produces. The answer is not to grant more rights to shareholders. It's to enact a far more progressive income tax, including a sharply higher marginal rate on yearly incomes above, say, a measly million.

Mr. FRANK of Massachusetts. I am on my time. I gave myself a minute.

Mr. FRANK of Massachusetts. Mr. Chairman, I will yield myself 1\1/2\ minutes. I congratulate the gentleman on the high art of selective quotation, because he quoted from former Secretary Reich. He left out the thrust of the article which was, he was against doing this because instead he thought we could change the Tax Code. In fact, that article is mostly an attack on the tax cuts which the gentleman from Delaware supported. Secretary Reich's article is essentially, and I will submit it for the Record under our general leave, I was waiting for the gentleman to quote those parts of Mr. Reich's article in which he calls for significant increases on taxation of upper-income people. I have to say to my friend, it is only a partial quotation.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield 5 minutes to the gentleman from Georgia (Mr. Scott), one of the most active members of our committee and a man with significant business experience.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield myself such time as I may consume. This is a bill to further the workings of the capitalist system of the United States. It has one very specific provision. It says that the shareholders, the owners of public corporations, will be allowed to vote every year in an advisory capacity on the compensation paid to their employees who run the companies. Now, Mr. Chairman, some might think this is unnecessary. In a better world, it would be. But there is not now any clear-cut, uniform, legal right for the shareholders to get such a vote. Some corporations allow it, some do not. Some boards of directors allow it, some do not. In a recent case, the SEC ordered AT&T to allow such a vote, but it was because of certain circumstances. There is no general principle that allows it. We do have, thanks to the Securities and Exchange Commission under our former colleague from California, Mr. Cox, a provision that I am sure many considered to be an intrusion into the private affairs of corporations, because without regard to the wishes of the corporations, the SEC under Chairman Cox has unanimously adopted rules that require corporations to put in the annual proxy form a chart of compensation for the top officials and an explanation of the theory of the compensation by which they are there. Understand that this is a decision by the SEC to require corporations to do what they would not otherwise have done, because it only applies to those who haven't done it. We add one simple fact here. The SEC has said that it does not have the power to go further and compel corporations to allow the owners to vote. Our bill simply does that. Our bill simply says, you will have on your proxy form, printed anyway, what the compensation figures are. There is no debate about how they will be presented. We require, if this bill passes, corporations simply to add to that a box that says ``I approve/I disapprove,'' and you can check it as appropriate. And the sole expense to the corporation is the ink in printing ``approve'' or ``disapprove,'' and the tallying along with the other tallying. There is no additional paper, there is no additional anything else. We have had a situation in which people, including the President of the United States, have acknowledged that in some cases CEO compensation has become excessive. I believe that that is clearly the case. A study done by Professor Lucian Bebchuk at Harvard, unrefuted by the defenders of the current corporate compensation system, notes that the amount of corporate profits going to the salaries for the top three employees, the compensation to the top three employees has about doubled to the point where a year or so ago it was nearly 10 percent. We are talking about real money. We are talking about money that goes to these top executives that could be used for other purposes. For example, when Mr. Nardelli of Home Depot received a $210 million good- bye kiss that had been written into his contract, when he was fired and given a $210 million consolation prize, Home Depot was at the same time announcing that they were putting $350 million into improving the stores. Well, suppose Mr. Nardelli had been sent out into the cold, hard world with only $50 million for the rest of his life. $160 million more would have been available to add to that $350 million for the stores, considerably more than a third. In other words, that was a real number. If $350 million can fix up the stores significantly, another $50 million or $75 million could have increased that by up to 50 percent. The President himself has acknowledged that the compensation has gotten out of hand. But from the standpoint of the President, excessive CEO compensation, increased inequality in our economy, which is a part of this, global warming, they all have certain common elements; the President and some of his supporters have reluctantly acknowledged the reality of those things, having denied them for some time, but they appear to regard them as facts of nature that were neither caused by nor can be corrected by human action. We disagree with that. Now, people have suggested that the salaries are too high and Congress should limit them. We reject that. This bill as we have presented it does not intrude into the process of setting compensation. Mr. Chairman, some of the amendments offered would do that. There are amendments that would alter the effect of this, depending on the kind and amount of compensation. I think those are erroneous. I think some of my friends on the other side have become, in their zeal to defend corporate compensation levels, de facto, in a bad situation. They would be more intrusive. All we say is this: The shareholders own the companies, and we believe the shareholders should be allowed to vote. Now, some people have said that is up to the board of directors, why are you singling out compensation for the CEO? And there is a good reason. You can make arguments about corporate governance one way or the other. We are not going beyond one point here. The relationship between the CEOs and the boards of directors is very different than most of the relationships the boards of directors have. The CEOs and the boards of directors select each other. There is a lack of an arm's length situation there that we think makes it appropriate to single it out and let the shareholders vote. It is only an advisory vote, that is true, and you will hear the contradictory argument that we are both too intrusive and not sufficiently intrusive into the affairs of the corporations. But we have more confidence in the boards of directors than some of our colleagues. Not completely, or we wouldn't have this bill. But we do not think boards of directors will likely disregard an advisory opinion from the shareholders and, therefore, we think that is an important input that the board should have. They have their ultimate responsibility, and maybe they will find some special circumstance that says, we can't follow in this case. The shareholders own the company, and we are simply giving them this right. The last point is, and we have heard people say, well, you are interfering with the affairs of the corporation. Corporations do not exist in nature; they are the creations of positive legislative action. No corporation anywhere has powers except those that are given to it by a government, and governments tell the corporations what powers they have, what immunities they have, and what rules they follow. The SEC just intruded very deeply into the affairs of corporations by requiring the posting of the compensation. We say that under current rules, including some State laws, and it varies from State to State, the shareholders don't have enough rights. And all we do here is empower the shareholders to vote on the compensation of the people who work for them. The last dogma I would deal with is, well, how can the shareholders know that? It is extraordinary to me, Mr. Chairman, to listen to people who ordinarily are quite respectful of the wisdom of the market. And what is the market? The market is the people who buy the shares. Those are the people who make up the market. And apparently this group of people who are the shareholders are in most respects quite wise. But when it comes to deciding how much to pay the people who work for them, they get stupid, and this is somehow beyond their capacity. We disagree with that. We think this is a moderate and temperate approach to the issue of runaway compensation, excessive compensation, not in every case, and in every case it wouldn't be used negatively. I should have said one other thing. No one has shown any correlation between these outsized compensation examples and any metric of success. Indeed, too often they are metrics of failure because they are payoffs to get people to leave quietly. So we hope that this bill will be adopted and that shareholders who own the companies will have the right to express their opinion to the boards of directors on the level of compensation for the top employees of the company. Mr. Chairman, I reserve the balance of my time.

Mr. FRANK of Massachusetts

Mr. FRANK of Massachusetts. Mr. Speaker, I ask unanimous consent that the Clerk be permitted to make technical changes in the engrossing papers to conform to the Union Calendar print of the bill.

Mr. FRANK of Massachusetts

Mr. FRANK of Massachusetts. The gentleman misunderstands my point, and I will correct it. I am taking back my time. I was not referring to the gentleman's de facto defense of the salary; I was referring to the gentleman from Texas' statement. He denigrated the product of this legislation because it would produce a nonbinding resolution. In fact, he sneered at it as a sense of the stockholder, sense of the shareholder resolution. And my point was aimed at his argument that the notion of a sense of the resolution is meaningless would invalidate a lot of what we do. So that is the issue I was making. Let me just say in closing, Members on the other side sometimes get separation anxiety when they are forced to differentiate themselves from particular corporate abuses. They brought themselves to do it with Sarbanes-Oxley, but they are having in various ways buyer's remorse there, I think excessive buyer's remorse. Members say we don't like corporate excesses, but we can't do anything about it. Well, no, Congress should not substitute its judgment for the market, Congress should not set the salaries. What Congress can do is to empower the shareholders who own the companies to express their opinion. It is not a right that the shareholders uniformly have now. It is Congress in exercise of the legislative power to set the rules for corporations, which is inherent in the nature of corporations saying that on this one issue; and by the way, one reason for singling them out is, there is reason to believe that the relationship between the boards of directors and CEOs is not sufficiently arm's length for the decision to be left entirely to the board without input. It doesn't mean you take the decision away from the board elsewhere. It simply says there have been excesses in corporation compensation, we think it would be helpful if the shareholders could give an advisory vote. There is really no good argument against it, and that is why we have heard arguments against that aren't very good, that aren't very logical, that aren't based in reality. That is all we are voting on. And in the absence of this bill, Members can then take credit for continuing to enable salaries paid to the top executives to go up and up and up. And if you are a shareholder of a corporation and you think that is a mistake and you think that is damaging, you have the option, we are told, of selling your shares at a loss, of being excluded from an investment decision that you think is in your interest. That is not acceptable.

Mr. FRANK of Massachusetts. In the House. Yes, sir.

Mr. FRANK of Massachusetts. I yield to the gentleman from Alabama.

Mr. FRANK of Massachusetts. I thank the gentleman and the Rules Committee for bringing forward an open rule. I often disagree with my colleagues on the other side, but I have rarely before been as baffled by the illogic of their argument as I am today. I do not recall the last time I heard such a hodgepodge of inconsistency and inaccuracy. This is a bill that has been condemned for being, A, bullying and intrusive, and B, toothless. The toothless bully is, I guess, a new concept. In fact, let me begin with this denigration of the notion of nonbinding resolution. The gentleman from Texas kind of slipped, I think, when he said ``the sense of shareholder resolution.'' In fact, we spend much of our time passing nonbinding resolutions. Members who think nonbinding resolutions are a waste of time probably should just show up on Wednesday because that is all we do generally on Mondays and Tuesdays, although we are doing more since we have taken over. But let's get to more of the substantive mistakes. My friend from Alabama said we would be second-guessing every corporate salary. Of course not. That isn't even remotely close to being even partially true. We have deliberately said it is not our job to say what the salary should be. We are empowering the shareholders to voice their opinion. Now, I will acknowledge at the outset, if a board of directors sees a vote and the majority of the shareholders vote ``no'' and they decide to vote ``yes,'' the board has that right. I doubt that the board would do that much. In fact, I would not impute to the boards of directors what my colleagues impute to them, a contempt for the views of shareholders. There may be individual cases where shareholders didn't understand certain things, new events may have intervened. But, no, I do not believe that as a general rule people on the board of directors will ignore shareholders. And by the way, we are talking about the shareholders, and I know the gentleman from Texas said they are outsiders, they are activists, as loathsome a word as the rules of the House will allow as he would use it. They own shares. They are the owners of the companies. What a denigration of the people who are in other contexts the fountain of all wisdom. We are told the market is, after all, the best source of wisdom. The former majority leader from Texas used to say, governments are dumb; markets are smart, markets work well. Well, who is the market? The market consists of the people who own the shares in this case. How did they become so dumb when it comes to deciding how to pay for the people that work for them? And we are told, okay, if they don't like it, they can sell their shares. What a concept of ownership. I mean, these are the people, many of them who are outraged at the eminent domain issue. What they are saying is, if you have owned shares in a company for a while, you have made your decision that this is the best way to diversify your portfolio, and then some board makes a decision with which you disagree, that you think may hurt the company, sell your shares. What kind of a denigration of the notion of ownership is that? There are, of course, people who will tell you, wait a minute, what if I believe when Home Depot, for instance, did what it did with Nardelli, it had a very negative effect on people's perception of the company. One of the very decisions you disagreed with led to a drop in the value of the shares because the market said, why did they do that. Should you then sell your shares and be forced to take a loss or take corrective action and restore the value to your shares? That is what we are talking about. It is very simple. And then the oddest one of all is, how dare we interfere with corporations? Corporations are artificial creations of positive law. God made no corporations. No corporations evolved. I will be neutral on that subject. Corporations exist because the law of a jurisdiction creates them. It creates them to give them certain advantages, certain immunities, et cetera. Of course, the government tells corporations what the rules are. This notion that we are interfering with corporations is nonsensical. They exist according to positive law. And the law says, you must do this, you may not do that. That is what corporations are. And now the gentleman will say, oh, well, look what the SEC did, we don't have to get involved. What the Securities and Exchange Commission did was very intrusive. And the gentleman said, well, the corporation can do that if they want to; they could have published the salaries if they wanted to. The Securities and Exchange Commission said, we mandate you to print these salaries. And by the way, to the extent that there is an expense, it is much more in what the SEC did than in what we did. CBO has concurred, there is zero, maybe 8 cents expense here. The SEC has already mandated that the corporations print in the proxy form all this information. We mandate that they add a box, ``yes or no.'' And then my friend from Alabama, great civil libertarian, but on this one I think he may have gotten a little too extreme in his civil libertarian zeal, he said, we are making the shareholders vote. It sounded like he said we are standing over those poor shareholders with a whip and making them vote. Well, in the first place, we are not. Abstention remains an option for shareholders. Secondly, the argument is, well, they already have that right, some of them. No, they don't in every case. There are corporations that have refused to allow it. AT&T was just ordered by the Securities and Exchange Commission to allow this procedure, but it was a case-by-case issue. It is not a general rule. So the SEC that you defend just ordered AT&T to do this, they just intruded, as is their right; but there is not a general principle. Shareholders do not have a right to have this vote on executive compensation. And this bill simply says, the people who own the company take what the SEC has mandated they put forward, has a right to vote on it. Now we are told, and the gentleman from Texas, in a stirring peroration, said he stood for truth, justice, the American way, et cetera; and said, let's reject the European effort. Well, this is not a general European practice, it is a practice in England, what we are talking about. There is a committee that is known as the Paulson Committee, because it was inspired by Secretary of the Treasury Paulson, chaired by Professor Scott of Harvard. There was the McKenzie report, done by Mayor Bloomberg, strongly supported by the Chamber of Commerce and all the financial groups. They have said to us, can't you guys be more like England in your regulation of corporations? Listen to the debate going on right now over relations of corporations in America. We are being told that the model is the British model, the Financial Services authority. This is Secretary Paulson's committee that said it, this is the Chamber of Commerce. Yes, the English do do this, it is not a big continental thing. But if, in fact, you think we should be very careful never to do anything because the English are doing it, then where is the repudiation of the McKenzie report and the Paulson Committee report which have urged the SEC to follow the model of Financial Services. In fact, it is very straightforward. Here is the problem. Why do normally coherent Members talk in less than coherent form about this, making contradictory arguments, ignoring reality? Here is the deal. My friend from Alabama said, I am not here to defend CEO salaries. But in fact he is, because what this bill says is, the shareholders, not the outsiders, not those evil activists, not those lurking labor agitators, people who own shares. And, by the way, this is strongly supported by the leaders of institutional shareholders, large pension funds, The Corporate Library. Shareholder groups are in favor of this. And it says that people who own the shares should be able to vote in an advisory capacity on whether they think the compensation is too much or too little. Now, the fact is that the gentleman from Alabama said there have been outrageous examples of excessive compensation. It is going up in general to the point where it is a record problem, and he says he is not here to defend them. He is not here to defend them verbally, he is just here to defend them parliamentarily, because if this bill dies, then they are totally unimpeded. And Members have said, don't rush in. Well, these salaries have been going up for a long time, and this is a long-time trend. So if not this, what do you do? It is true, the SEC went to the limits of its power.