Letter on Effective Corporate Governance and Executive Compensation Policies

September 22, 2009

The Honorable Timothy F. Geithner
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Secretary Geithner:

The U.S. Chamber of Commerce, the world's largest business federation representing more than three million businesses and organizations of every size, sector and region, is supportive of efforts to resolve the financial crisis by the G-20 nations. On September 3, 2009, French President Nicolas Sarkozy, German Chancellor Angela Merkel and United Kingdom Prime Minister Gordon Brown, sent a letter to Swedish Prime Minister Frederik Reinfeldt, in his capacity as European Union ("E.U.") President. The letter requests E.U. support for a plan to create binding rules regarding compensation and governance at the upcoming G-20 summit in Pittsburgh (the "Pittsburgh Summit"). The Sarkozy-Merkel-Brown plan would restrict certain forms of compensations, specifically bonuses or variable compensation.

The Chamber is concerned that the Sarkozy-Merkel-Brown plan will establish mechanisms for government micromanagement of business that may bring about unintended consequences causing harm to domestic and global economic growth for years to come. In order to avoid these pitfalls, the Chamber believes that the G-20 leaders should use the Pittsburgh Summit as an opportunity to take constructive steps to rebuild economic growth and job creation on the foundation of the free enterprise system.

Earlier this year, the Chamber wrote to you with principles for effective corporate governance, investor responsibility and executive compensation. Those principles are:

• Corporate governance policies must promote long-term shareholder value and profitability but should not constrain reasonable risk-taking and innovation.
• Long-term strategic planning should be the foundation of managerial decisionmaking.
• Corporate executives' compensation should be premised on a balance of individual accomplishment, corporate performance, adherence to risk management and compliance with laws and regulations, with a focus on shareholder value.
• Management needs to be robust and transparent in communicating with shareholders.

These principles are an important template to allow for reasonable risk taking, continued innovation, fostering the ability to acquire and retain talent, while protecting investor rights. The use of these principles by directors and shareholders can develop compensation and corporate governance practices that best suit a company and fit the unity of purpose shared by directors and shareholders—the longterm viability and profitability of a company.

Nevertheless, the Chamber is concerned that the Sarkozy-Merkel-Brown plan violates these principles and promotes policies that will harm businesses and adversely impact future economic growth and job creation.

Historically, government policies on executive compensation have been touted as a solution, but in reality have been a part of the problem. For instance, in the 1980's, stock options were seen as a solution to compensation excesses. Today, stock options are frowned upon as an excess and are perceived to be a portion of the difficulty. The imposition of the million dollar tax deduction in 1993, rather than limiting executive pay, set a floor and in fact accelerated compensation increases. These are but two examples of solutions making the problem worse, while preventing directors and shareholders from grappling with the issues as they have for 150 years.

Placing binding limits, as advocated in the Sarkozy-Merkel-Brown plan, can, for instance, move executives to a consultancy basis with less director oversight. Therefore, decision making and risk management can be shifted into a gray area outside of corporate governance accountability. Binding restrictions may make firms unnecessarily risk adverse, stifling innovation, potentially harming consumers and ultimately stunting long-term economic growth. Furthermore, a one size fits all approach will lessen the dialogue between directors and shareholders and reduce any flexibility within corporate governance structures. Rigidity will harm business development, unfavorably influencing economic growth and job creation. Additionally, the imposition of unilateral compensation restrictions by the E.U. could adversely impact global trade by forcing businesses to move executives out of E.U. jurisdictions.

Simply put, the path of action advocated in the Sarkozy-Merkel-Brown plan may make the problem worse, with far-reaching unintended consequences. We have seen, domestically and internationally, that green shoots of economic recovery are taking hold. Misguided decision making at the Pittsburgh Summit can strangle that recovery and hamper the economy for years to come. The ever increasing politicization of compensation and corporate governance has made it harder for directors and shareholders to perform their duties and exponentially created loopholes.

Government micromanagement and political pandering has spawned unintended consequences that have harmed the economy. For the Pittsburgh Summit to be successful, leaders should develop policies that lead to the reprivatization of the global economy. The free enterprise system has been the greatest force for prosperity and job creation in world history. Now more than ever, world leaders should reaffirm the spirit of enterprise and reject the short-term political gains of populism.

Sincerely,

David T. Hirschmann
President and Chief Executive Officer
Center for Capital Markets Competitiveness
U.S. Chamber of Commerce