Catherine R. Kinney
Group Executive Vice President
New York Stock Exchange
11 Wall Street
New York, NY 10005

VIA OVERNIGHT MAIL

Re: Shareowner Approval Requirements for Stock Option Plans

Dear Ms. Kinney:

Thank you for the opportunity to comment upon the New York Stock Exchange's policy with regard to shareowner approval requirements for stock option plans. On behalf of the California Public Employees' Retirement System (CalPERS), I submit the following comments and look forward to our continuing discussion as part of the Task Force review of this issue.

CalPERS is the largest public pension system in the country, with assets currently valued in excess of $140 billion. These assets, which provide retirement benefits to over 1 million of California's government employees and their families, are invested heavily in the U.S. equity market. The average holding period for our common stock is well over 10 years. CalPERS is both a substantial and long-term investor in this market.

Pursuant to the California Constitution, in making and managing investments CalPERS' Board of Administration must meet a "prudent expert" fiduciary standard that is comparable to that imposed upon trustees of private pension plans governed by the Employee Retirement Income Security Act of 1974. This standard governs both our investment decisions and the exercise of our voting rights for equity securities. It is because of this paramount duty to maximize investment returns that CalPERS places such a great value upon our voting rights.

CalPERS' views with regard to stock option plans, and the right of shareowners to approve those plans, can best be understood in the context of the way in which these plans are currently being used. According to a recent survey of 350 large companies by William M. Mercer, Inc., more than a third (35.4%) have stock option arrangements that would be - under the Exchange's recent definition of "broad-based" - exempt from shareholder approval. This is up from 29.7% in 1997. Between 1994 and 1997, the number of stock options granted by these large companies grew 100%. The size of option packages has similarly grown. In 1996, 24 of the 80 large companies studied by Pearl Meyer and Partners, Inc., (or 30%) offered option grants with a face value of more than $10 million. In 1997, this proportion dramatically increased, to 26 out of 55 companies studies (or 47%). No one can seriously doubt that stock options are assuming an increasingly significant role in the overall compensation and ownership structures of U.S. companies.

This growth is not, by itself, per se negative. In fact, it is a reflection at least in part of a decade of pressure from institutional investors to connect compensation to equity value. As one commentor noted, "shareholders have been getting what they asked for." Yet, while the investor community pushed for greater links between compensation and equity, it was always with the understanding that shareowners, through their approval authority, must also be diligent to protect against excessive compensation. "[Institutional investors] have the resources and expertise to make meaningful suggestions on how to better compensate top executives and the incentive to work toward compensation programs directed at long-term as well as short-term goals."

CalPERS recognizes that many regulatory changes have occurred during the past three years to gradually erode the shareowners' right to approve stock option plans. We have always been comforted, however, by the knowledge that, in the end, the exchanges' rules preserved this right. Perhaps that sense of reassurance was illusory. Nonetheless, it is clear now that the NYSE rule's current definition of "broad based" effectively destroys the last bastion of the shareholder franchise in this area.

Your request for comment focused on this "broad based" definition. CalPERS believes that distinction (i.e., looking only at the eligibility scope of the plan) does not fully recognize the purpose of the shareowner vote. While the scope of a plan is relevant, if shareowners' sole concern is aligning top executive and shareowner interests, it is irrelevant in light of our more primary inquiry: does the plan excessively dilute the value and voting power of the stock held by existing shareowners? For this reason, CalPERS urges the Exchange to revisit the premise of this rule and ensure that shareowner approval is required for all option plans with a potential material dilutive impact. In our view, 5% dilution would be a reasonable threshold to trigger a shareowner approval requirement.

If the Exchange remains committed to the "broad based" distinction, CalPERS strongly recommends that such plans only be exempted from shareowner approval when (1) the "broad base" includes at least 70% of the work force (excluding those covered by collective bargaining), and (2) the standard looks to actual participation, not potential participation.

Thank you for the opportunity to comment on this important issue. Again, I look forward to future Task Force discussions.

Sincerely,

KAYLA J. GILLAN
Former General Counsel

KJG:cl

cc: James E. Burton, former CEO, CalPERS
Richard Grasso, Chair and CEO, NYSE
Frank G. Zarb, Chair and CEO, NASD
Arthur Levitt, Jr., Chairman, SEC