Richard A. Grasso
Chairman and Chief Executive Officer
New York Stock Exchange
Eleven Wall Street
New York, NY 10005

Dear Mr. Grasso,

I am writing on behalf of the California Public Employees' Retirement System (CalPERS) in response to the Report released by the Corporate Accountability and Listing Standards Committee.

First, I would like to commend you and the Committee on the Report. I think the Committee correctly summarized the situation we all face currently in noting that the Exchange has not only an opportunity, but the responsibility, to raise corporate governance and disclosure standards.

CalPERS has long been active in advocating good corporate governance. As one of the recognized leaders in this area, we would like to express our strong support for revisions to the NYSE listing standards. Generally speaking, we are very supportive of the proposals as they have been presented in the Report; however, we do have a few comments and suggestions for your consideration. We hope the Board will consider these points as friendly amendments and act upon them accordingly.

CalPERS strongly supports shareowners' right to approve all equity-based compensation plans. We consider this a fundamental right of shareowners, and we support shareowner approval of all changes to existing equity-based compensation plans. This should include repricings of any form.

As a point of clarity, we request that you explicitly include equity plans that are funded by treasury shares in the proposed listing standards. It is my understanding that current listing standards do not require approval of plans that are funded by treasury shares. We do not feel that a distinction of this nature should exist, and would like some reassurance that the proposal includes plans funded by treasury shares.

While we support the proposal to eliminate broker votes on equity compensation plans, it is our strong preference to eliminate broker votes in all instances (except as needed to establish a quorum). Independence has always been the centerpiece of CalPERS' Corporate Governance Core Principles and Guidelines. We feel that independence is one of the single most important elements to ensure that the long-term interests of shareowners are guarded and fostered. For this reason, CalPERS' Core Principles call for at least a majority of independent directors on the board and 100% independent directors on the three key committees, audit, compensation, and nominating. We support your proposal to raise the NYSE listing standards to this level. However, we feel that the definition of independence that would be applied to the standards is unnecessarily vague, and would result in less effective reform than other alternatives.

As investors, we regularly evaluate the companies we invest in, including measures of corporate governance. As you might expect, independence is one of the key elements of our evaluation. Without a meaningful standard by which we can compare independence, our ability to make judgments across our portfolio, and thus provide a valuable balance between the corporations and their owners, is compromised. Accordingly, we have adopted a definition of independence that we use in evaluating this critical issue. You are probably aware that many other organizations, such as TIAA-CREF and the Council of Institutional Investors (CII), have also adopted comparable definitions.

Our concern with the proposal is that by leaving the determination of independence up to each company, investors will be left with no consistent measure of how companies compare in meeting the NYSE listing standards. It seems to be counterproductive to have multiple companies with what could be very different standards of independence all claim compliance with the NYSE listing standards. We suggest that the Board consider adopting a definition of independence consistent with those of leading institutions and require that companies use this definition in relation to the new listing standards. CalPERS' definition of independence is on our website (http://www.calpers-governance.org/), or we can provide you with further background if you desire.

The Committee specifically highlighted interlocking directorships as impairing independence. We agree with this position, but we suggest the statement be expanded to include any interlocking directorship, not merely a relationship that involves compensation committee interlocks.

We support your proposal to require listed companies to adopt corporate governance guidelines, as well as charters for their audit, compensation and nominating committees. CalPERS' Investment Committee recently amended our Corporate Governance Core Principles to expressly state that companies should develop executive compensation policies and submit these policies to shareowners for approval. We suggest that this be considered in connection with your requirement for governance guidelines and compensation committee charters in particular. As I am sure you are aware, executive compensation continues to be a very important topic to shareowners. For example, numerous shareholder proposals during the 2002 proxy season requested that companies submit executive contracts to shareowners for approval. While we are generally supportive of the reasons behind these proposals, we feel a more productive role for owners is in approval at the policy level, leaving the companies more flexibility to execute individual contracts.

In regards to the qualifications of the audit committee chair, we agree that it is desirable for this person to have accounting or financial management expertise. In fact, the CalPERS Investment Committee adopted as part of our Financial Market Reform Package a statement calling for increased financial expertise on the audit committees in general. While we recognize the limitations in obtaining sufficient members with the desired background and expertise to comprise the entire committee of these types of experts, we are calling for an increase in the number of members that have financial background supporting a level of expertise. Perhaps one issue the Board can consider is additional clarification of what constitutes financial literacy and financial expertise.

We are fully supportive of requiring that the audit committee have the sole responsibility for hiring and firing the auditor. Our position on audit industry reform calls for a bright line ban on auditors performing non-audit services , and therefore we would not support audit committee approval of non-audit services. We encourage the Board to strengthen this critical element of the proposal by establishing an outright ban on the auditor performing non-audit services.

CalPERS is also suggesting that audit committees consider obtaining dedicated staff support to help facilitate the execution of their duties. We feel that this is consistent with the Committee's proposal that, as appropriate, the audit committee obtain advice and assistance from outside legal, accounting, or other advisors. For clarity, we suggest that this statement explicitly include reference to retaining support staff. In addition, we advocate that the audit committee should meet at least once per year with the external auditor without management present.

CalPERS supports mandatory rotation of the audit firm, and we suggest a 5 to 7 year period as a reasonable time period to require rotation. We simply disagree with the Committee's statement that mandatory rotation "may undercut the effectiveness of the independent auditor and the quality of the audit." To the contrary, we feel that mandatory rotation would likely increase independence and the overall quality of the audits. The accounting industry has argued against rotation, partly based on increased costs to shareowners. As one investor, CalPERS is willing to accept increased costs associated with the audit to help ensure the independence of the auditor and thus the quality of the audit. We feel that it would be money well spent, particularly in relation to the staggering losses investors have endured because, at least partially, of poor auditing. As a point of reference, for the past 20 years CalPERS has rotated its auditor every five years.

Your proposal that the NYSE develop a directors' institute in conjunction with leading authorities in corporate governance is excellent. There are currently several programs in existence, some of which CalPERS is involved with, that I am sure would welcome additional support from the NYSE. One issue that you may consider is an even stronger emphasis on director training by providing specific incentives for directors to dedicate time and effort toward training. CalPERS would be interested in participating in any additional activities the NYSE chooses to pursue in the area of director education.

In summary, I would like to reiterate our compliments on the work of the Committee, and our strong support for all the amendments to the NYSE listing standards aimed at raising corporate governance and listing standards. We sincerely hope that the Board will consider our suggestions for potential additional steps that may be taken to further strengthen the proposed standards. Should you have any questions or need additional comment please feel free to contact me or Ted White, CalPERS' Director of Corporate Governance, at (916) 341-2731.

Sincerely,

JAMES E. BURTON
Former Chief Executive Officer

cc: Members, CalPERS Board of Administration
Harvey Pitt, Chairman, Securities and Exchange Commission