Good afternoon. It is a pleasure to be with you this afternoon to share with you one institutional investor's perspective on globalization.

I would like to thank those involved in coordinating this first international forum on globalization for including CalPERS and inviting me to speak here today. It's important to gather like this to share ideas and generate dialogue, such as I hope we will engage in this afternoon.

I would like to take this time to address the rapid globalization of the capital markets, and in particular, I want to provide one institutional investor's perspective on the creation of a global marketplace -- a single, physical, 24-hour international trading market.

But first, let me give you a brief overview of the California Public Employees' Retirement System -- CalPERS.

CalPERS is America's largest public pension fund, and we're the third largest in the world. Our mission is to provide for the financial and health security of over one million public employees and their families by providing for their retirement and health benefits.

One third of our members are state employees and their families. Another third come from the ranks of classified school employees. And the remainder are local government employees.

We were established in 1932 as a defined benefit plan. CalPERS is a prefunded system, and one of the few that is nearly fully funded.

We manage assets of more than $110 billion. Our earnings from investments contribute the lion's share of funding needed to pay out 4.5 billion dollars in benefits yearly. Nearly 70 cents on every dollar in our fund comes from investments, with the remaining 30 cents equally from two sources: the taxpayers and the contributing members.

Our pension trust fund is managed by a 13-member Board of Administration, consisting of elected and appointed members including the State Treasurer and Controller. I am appointed by the State Personnel Board which is an independent constitutional agency whose mission is to create, and guide a civil service system for California.

The CalPERS Board is assisted by 1,000 staff, and numerous external advisors, consultants, and investment managers.

Over the last decade, we have witnessed a change in capital markets worldwide. Continually, we see a move away from traditional forms of financing and a collapse of barriers to globalization of the capital markets.

The end result is that corporations from around the world are beginning to compete with each other in every market. This competition is forcing corporations to reduce labor and capital costs, improve productivity and change the way they do business in order to sustain viability. In doing so corporations are tapping international markets.

There has also been a dramatic increase in levels of institutional investment in the international markets as well. By one estimate, ownership of foreign shares by the largest 200 U.S. pension funds grew roughly 34 percent to more than $225 billion dollars over the last two years.

CalPERS entered the international security markets in the late 1980s for all the usual good reasons: to seek better returns and achieve diversification.

In December 1994, the CalPERS Board decided to increase the System's asset allocation to international equities from 12 to 20 percent of the Fund's total portfolio. Today, CalPERS exposure to the international markets is among the largest of any major U.S. pension fund with -- over $24 billion invested outside the United States in equity and fixed income.

This increase in international ownership combined with the rapid globalization of markets has had a number of important consequences for CalPERS over time.

CalPERS has long been at the forefront of shareholder activism in the United States. We are recognized as a standard-bearer for the corporate governance movement.

As a large institutional investor, we have become long-term shareholders of major corporations. In most cases, high transaction costs associated with selling equities, larger portfolios, and more money to invest have all created incentives for us to buy and hold. As a result, we have used corporate governance activism to improve performance in the United States.

As the size of international holdings began to grow, we asked ourselves -- if we are going to exercise our ownership rights to increase returns to our trust fund, should these efforts stop just because investments are outside the United States? Given our fiduciary responsibilities, are we even free to ignore international corporate governance?

At the same time, we recognized that globalization was largely causing countries to reassess and adapt their corporate governance systems to a more competitive environment. The realization that economic and capital markets were quickly breaking down barriers to globalization presented a significant opportunity for us to share our domestic corporate governance experiences. We felt we could ultimately influence the discussion as to what form corporate governance should take in a global market.

As a first step in understanding the unique differences of the global markets, we conducted a study on the role of international corporate governance and increased performance monitoring of our international stock holdings. Based on this study, we adopted a formal International Corporate Governance Program in March 1996 focusing on the four countries with the System's highest equity exposure: Japan, France, Germany and here, in the United Kingdom, where we have roughly $3.7 billion invested.

We soon followed the study with the adoption of a set of global governance principles. The principles focus on the six basic concepts that are fundamental to free and fair markets throughout the world, without impinging upon the legal, economic and cultural traditions of each country. Moreover, the principles reflect the core of the corporate/shareholder relationship. The principles address the following:

• director accountability to shareholders;
• transparent markets;
• equitable treatment for all shareholders;
• easy and efficient voting methods;
• codes of best practices that define the director shareholder-relationship; and
• long-term corporate vision which at its core emphasizes sustained shareholder value.

Last month, we adopted market-specific principles for the United Kingdom and France. These principles are designed to complement the governance work already performed by investors within these countries -- the Cadbury Code and Greenbury Report in Britain, and the Vienot Report in France.

The principles embody the growth and changes inherent in the corporate governance systems in the United Kingdom and France. Ultimately, they will serve as a tool to assist us in monitoring our investments in these countries while pursuing better corporate governance for the companies in which the Fund invests.

Clearly, the phenomenon of globalization has already had significant impact on the way we invest and monitor our holdings abroad. Moreover, it appears that there is a convergence today toward a continuous market structure.

The most important and difficult question to address concerns the future of world-wide exchanges. Is there a need to create a global marketplace for financial products, be they fixed income, equity, derivative or commodity on a single 24-hour international market? And if so, what are the requirements for that type of market from an investor's point of view like CalPERS?

First, it is important to distinguish between a global market and a global marketplace. From CalPERS perspective, a 24-hour global market exists today for what has become one of the most important financial instruments in the world -- U.S. Treasury securities.

Major Wall Street firms have long passed the Treasury "order book" around the globe from New York to Tokyo to London and back to New York chasing the daily operating hours of local trading communities. Likewise, foreign currency trades can be accomplished at any point of time somewhere in the world as evidenced by the fact that the daily capital flow through world money markets is currently $1.3 trillion, which is about 50 times more than is needed to finance all the world's trade and investments.

Equity transactions are a bit more problematic, but the combination of cross exchange listings, and off-exchange trades certainly provides a good measure of world-wide liquidity -- that is near 24-hour liquidity.

So, there is a global market today. But, what does not exist at this point is a single, physical, global marketplace.

It is easy to get caught up in the excitement of global trading, particularly with the cutting-edge technology and flow of mass information.

As one Wall Street bond trader so precisely stated it -- "With the growing use of e-mail, voice mail, CNN and other innovations of technology, professionals are on call 24-hours a day."

To best understand the global markets from an investor's point of view, it is helpful to step back and take a more fundamental look at why markets exist.

Historians tell us that what we now call "exchanges" began as informal gatherings of local investors where news could be disseminated. If advantageous, two investors would "trade" some part of their financial holdings between themselves on the spot.

Since these gatherings were all local, investors would physically represent themselves and no intermediary was necessary. These early exchanges were a very basic form of what economists refer to as a "call market."

As these informal exchanges grew and became more popular, it was no longer possible for all investors to be physically present because of travel distances, so a new group of locals became "agents" for those investors who were unable to attend. The market which developed from the introduction of intermediaries into the former call market is what we now call an "auction market."

As some of those local agents gained more wealth from agency fees, they began acting as principals in transactions to provide liquidity for anxious sellers, and earned a financial reward for the expanded functions. The principal market which developed both within and outside the auction market is called a "dealer market."

Interestingly, as the local agents began to outnumber investors at the gatherings, they decided to band together to create an "exchange" where only agents could buy and sell. Investors were no longer allowed to trade with other investors at the gatherings. Investors had lost control of the marketplace that they had created; rules and restrictions were now set by agents.

This brief look in the rear view mirror is important because it focuses our attention on the types of markets which exist today and the way rules now dictate trading.

It is not at all clear to our investment professionals that there is a compelling reason for a physical marketplace to be created given the substantial legal, cultural, and sovereignty barriers which oppose any such supranational marketplace.

As a large institutional investor, we are faced with the daunting task of managing a very substantial pool of assets. As long-term investors, we trade relatively infrequently. Many of our trades are passive, or information-less trades. When we trade, we want readily available liquidity and a fair price. We rarely make frenetic trades based on a current news item. Therefore, our particular purposes are best served by a market place with dynamics close to what I have referred to as a "call market."

Many economists look with great disdain on continuous auction markets. Maurice Allais, Nobel Prize winning economist, has stated that "...the continuous trading market is an aberration from an economic viewpoint and generates a potentially permanent instability favoring fraud and manipulation of the market." He adds, "... [markets could be improved] by eliminating the continuous market and replacing it everywhere with a single daily trading price for each market..." While this position may be a bit extreme, it does seem that the continuous market environment is not necessarily the best environment for very large investor like CalPERS.

The best explanation of why call markets might be best for CalPERS is that we need a large amount of liquidity at a point in time to make transactions in the size appropriate for our funds. If a market has a finite amount of liquidity, it is best for CalPERS that the available liquidity be focused at a point in time, rather than dissipated throughout the trading day. We would rather compete with other investors for liquidity at a point in time rather than surrender our assets to the spikes in prices and potential manipulation which could occur throughout the time period it sometimes takes to trade a large position.

While I should note that it may be true that continuous markets stimulate liquidity, it is not clear that the net benefit of a dispersed amount of increased liquidity is a net positive for large investors.

So the ideal form of a market for a large, relatively infrequent trader and long-term investor such as CalPERS is something close to a call market. Of course, such markets now exist for equities in the United States as crossing networks. Essentially, these are marketplaces where investors have regained control of the marketplace from the agents and dealers. We expect this type of trading to continue to grow, and there is some very interesting new technology on the horizon.

An especially interesting example of the new technology being developed in the United States is by a company called OptiMark. OptiMark uses very sophisticated quantitative optimization models to match orders for securities.

Here's how it works. Each investor submits a bid or offer indicating both price and volume parameters for individual securities. These indicators are completely blind to everyone except the computer which matches trades in such a way as to optimize the "mutual satisfaction" or all market participants in each stock. These matches are done as pre-specified intervals throughout the trading day. Trades will actually be posted on the Pacific Stock Exchange through member firms.

The sophisticated financial modeling and computer power necessary for this new technology has become available only within the last 2 to 3 years. We are very excited about the possibilities of use of this new technology in several markets.

One possible construct of the global marketplace is a supranational exchange for financial instruments. However, the obvious sovereignty, legal, and political risks to the development of a trading exchange like this ruled by an entity that is above governmental regulation would clearly not be in the best interests of CalPERS given our fiduciary responsibilities as a public pension fund.

Now, some would argue that such markets currently exist such as foreign currency, and we would expect these markets to continue. However, what does not exist, is a centralized marketplace on which global assets are traded and ruled by an entity which does not answer to the regulations of any country.

In the absence of a supranational exchange, our investment professionals believe that the economic, political, and technological trends are moving us inexorably toward around-the-globe trading within more efficiently constructed local marketplaces. And the cost of entry for local markets to the evolving global marketplace will be less local regulation in some cases, increased financial disclosure in most cases, and the adoption of something akin to United States standards for settlement and administration of trades.

As CalPERS presence grows in the international markets, our desire is for the continued globalization of markets and the introduction of new technology, which will result in some markets taking the form of call markets capable of meeting the focused liquidity needs of organizations like CalPERS.

I hope I've been successful today in sharing our System's perspectives on our role in international investments, corporate governance, and globalization. It is, of course, the perspectives of one institutional investor.

Nevertheless, we remain most interested in these issues, and the trends and challenges that are likely to continue to develop with the globalization of the capital markets. On so many fronts, both the risks and the opportunities have been born simultaneously.

We are indeed at a critical, and exciting, place in the development of our capital markets -- one I'm sure we will be discussing for many years to come.

Thank you.