Good afternoon. Welcome to the United States. It's a pleasure to be with you today.

I would like to thank the Brazilian Association of Pension Funds and the Institute for Social Security Culture which have honored me with an invitation to speak to you today. I must also compliment the University of Chicago for hosting this program and recognizing the critical role of corporate governance in today's modern corporate world. My hope is that we can share ideas and experiences about corporate governance today, and generate a continued flow of dialogue between our countries.

I'm here to speak to you about corporate governance in the United States and CalPERS role as an active shareowner within corporate America. Specifically, I would like to share with you some of the milestones in CalPERS history that have shaped the modern-day corporate governance movement as we know and practice it. More importantly, I want to discuss what we have learned and outline the next evolutionary step in our corporate governance program that we recently articulated in our U.S. Corporate Governance Program.

Please note that I use the word shareowner, not shareholder. In my opinion, we are long-term owners of these companies – the patient capital – not simply passive holders of shares.

I plan to cover three topics today:

• First, I'd like to give you a brief overview of the California Public Employees' Retirement System, better known as CalPERS – our purpose, our structure, and some of the factors that influence our organizational behavior.

• Second, I'll discuss CalPERS Corporate Governance Program in the United States and the birth of our U.S. Corporate Governance Core Principles and Guidelines.

• Finally, I would like to offer several final thoughts on the current corporate governance landscape, and the challenges that lie ahead as we approach the 21^st century.

Before I continue, I would like to take a moment to comment on an article that I read recently in the Wall Street Journal. It was about the Pele Law. I haven't read the law, and I'm certainly not an expert on Soccer. However, it seems to me that the Pele Law reflects increased disclosure and corporate governance. In my opinion, that's a good thing.

What is CalPERS?

CalPERS is America's largest public pension fund. We are the second largest in the world. We manage assets totaling more than $143 billion. 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. This is the most important factor to remember – the driver behind all of our decisions. It is the critical fact that we internally cannot forget. This is despite the visibility that our actions have in the investment world.

One third of our active members are state employees and their families. Another third are from the ranks of classified school employees. The remainder are local government employees. And almost a third of our total membership is retired.

We were established in 1932 as a defined benefit plan. A defined benefit plan is a retirement program that sets a benefit calculated on a formula, often a percentage of final average pay, times years of service, based on retirement age. In other words, CalPERS is a prefunded system. We are one of the few that is nearly fully funded.

Although CalPERS manages $143 billion, this is not one dollar too much. These assets are tied directly to the liabilities we face -- that is, the benefits that we are obligated to pay our participants. We face a tremendous obligation in the next century, as the largest segment of the US population (those born the decade immediately after the second World War) prepare to retire. CalPERS assets are invested with the goal of ensuring that there will be sufficient money available now, and into the future, without experiencing unnecessary or unexpected risk.

Currently, 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 active members.

The return on our investments is largely due to our asset allocation decision. It is essentially the starting point and most important component for us to achieve successful returns on our investments. Currently, our asset allocation consists of approximately $39 billion in fixed income, $98 billion in equities and $6 billion in real estate. More than $550 million is invested in South America.

Our trust fund is managed by a 13-member Board of Administration, consisting of elected and appointed members including the State Treasurer and State Controller. I have served on the CalPERS Board of Administration for 27 years, including 10 of those years as President of the Board.

In this time, I have witnessed the public pension industry grow into one of the most important, visible and growing sources of investment capital not only in America, but also in the world. When I first came on the board, we had assets of $4.5 billion. Today we have more than $143 billion. As I speak to the members of CalPERS – both young and old – I always wrestle with the question that plagues fiduciaries: How do we guarantee their future financial security?

At CalPERS we have no greater responsibility than the prudent management of our portfolio. We are under considerable and constant pressure to increase returns by pursuing every possible strategy to increase the value of companies in which we invest. As fiduciaries, we must discharge our responsibilities in accordance with the twin duties of loyalty and care. This is analogous to the duties of the directors of a corporation to its shareowners.

The duty of loyalty is sometimes referred to as the "sole purpose" doctrine. This means that the board and other CalPERS fiduciaries must act solely in the interest of members and beneficiaries. For this reason, CalPERS cannot base its corporate governance activities on social or political causes. Instead, we must focus on the "bottom line" of enhanced shareowner returns.

Under the duty of care, the board and other CalPERS fiduciaries must manage the fund as a "prudent investor" -- this means with the care, skill and diligence that a prudent person, familiar with the matters, would exercise under similar circumstances in managing a pension fund of like size.

As a large institutional investor with stock in over 1,600 American companies and over 750 companies outside the United States, we have become long-term shareowners of major corporations. High transaction costs associated with selling equities, larger portfolios, and more money to invest have all created incentives for us to buy and hold. In a sense, we have become the patient capital of companies. The idea of simply selling shares in the face of disgust – at a considerable cost to the System – has given way to the realization that being an agent for change makes better economic sense.

CalPERS Board strongly believes that using a passive strategy to select stock does not mean that we have to be a passive owner. We believe that we have a duty to our participants to put just as much effort into being an active owner as in deciding to become an owner in the first place.

To fulfill these duties, we use corporate governance activism to improve performance in the United States and abroad. Corporate governance, and the responsibilities of proxy voting that are a part of shareowner activism, are not just goals of public pension funds. The idea that good corporate governance and shareowners interests should become the "touchstone" for corporate directors has also been espoused by the U.S. Securities & Commission, ERISA and many other institutional investors.

CalPERS defines corporate governance to be the "relationship among valuable participants in determining the direction and performance of corporations." The primary participants are: shareowners, company management (led by the CEO) and the board of directors. We recognize that this may sound like an overly "American" definition because it does not expressly mention other stakeholder groups (the community, company employees, suppliers, and customers). In CalPERS view, companies that are operated with long-term shareowner returns as the primary goal will, ultimately, also reward other stakeholders. Companies that are driven by short-term goals don't reward anyone in the long-term. We believe that companies that elevate these other stakeholders to the same level as shareowners are simply diffusing accountability.

CalPERS Corporate Governance Program is a product that only experience and maturity can bring. In its infancy between 1984 and 1987, our corporate governance program was solely reactionary. It began simply as objections by a few shareowners to certain company actions that were considered to be self-serving (e.g. greenmail) Companies created anti-takeover devices and procedural obstacles that were viewed more as protecting the corporate status quo than serving the long-term interests of shareowners. We reacted to the anti-takeover actions of corporate managers that struck a dissonant chord with one's senses – as owners of a corporate entity – of accountability and fair play.

The late 1980s and early 1990s represented a period in which CalPERS learned the rules of the game. We learned how to influence corporate managers. We learned what issues are likely to elicit fellow shareowners support, and where the traditional modes of communication and networking between shareowners and corporations were at odds with current reality.

In late 1989, CalPERS began working closely with the US Securities and Exchange Commission. This relationship led to the 1992 reform of executive compensation disclosure and proxy solicitation reforms. These reforms paved the way to elicit support from other shareowners through communication and to work together to bring about change.

As our corporate governance program evolved, we turned our focus toward companies considered, by virtually every measure, to be "poor" financial performers. This process has exceeded our own expectations over the past decade. We have witnessed changes at corporations such as General Motors, American Express, Sears and Kmart, to name a few. Within each company, there are internal forces who are working to effect necessary change. CalPERS represents a catalyst for change; our attention on the company management acts to empower these internal change agents, who ultimately have the power to produce results. By centering our attention and resources in this way, we could demonstrate to those who questioned the value of corporate governance.

One of the most prominent studies of economic value achieved through shareowner activism is documented in a study performed for CalPERS pension consultant Wilshire Associates. The study, which was published in the Journal of Applied Corporate Finance in 1994 and later updated in 1996, demonstrated that CalPERS corporate governance efforts targeted at underperformers substantially improved our return on investments. It looked at the stock performance of 62 companies that we targeted between 1987 and 1995. During the five years immediately before our first contact, these companies underperformed the Standard & Poor's (S&P) 500 Index by an average of 85 percent. But with CalPERS first contact five years later, the companies outperformed the S&P 500 by an average 33 percent.

More importantly, we have estimated that the improvement of the 62 companies has resulted in approximately $150 million US dollars, annually, in added returns at a cost to run the program at less than $500,000 annually.

We believe that the impact of the corporate governance movement within the United States goes beyond the stock price of these 62 companies. No company – and no CEO of a company, nor any director – wants to receive close scrutiny from CalPERS. Boards and management are voluntarily and proactively taking steps to improve their own accountability and independence. Simply put, the American corporate culture has changed; good governance is now something that is being institutionalized and valued.

What have we learned during these past dozen years?

• We have learned that company managers want to perform well, in both an absolute sense and as compared to their peers;

• We have learned that company managers want to adopt long-term strategies and visions, but often do not feel that their shareowners are patient enough;

• We have learned that all companies - whether governed under a structure of full accountability or not – will inevitably experience both good and bad times along the path of profitability; and finally

We have learned, and firmly embrace the belief that good corporate governance – that is, accountable governance – means the difference between wallowing for long periods in the depth of the performance cycle, and responding quickly to correct the corporate course.

As one corporate governance scholar noted -- "A performing board is most likely to respond effectively to a world where the pace of change is accelerating. An inert board is more likely to produce leadership that circles the wagons."

With the benefits of this experience and knowledge, CalPERS embarked on the next evolutionary step in our program. Although CalPERS has been active in corporate governance for over a dozen years, we never formally adopted a set of principles that articulate precisely what the System expects of America's corporate boards. We do have a policy statement that describes why CalPERS – from a fiduciary perspective - considers governance issues important, and describes how CalPERS will conduct itself as an active shareowner. It does not, however, describe what CalPERS is seeking from corporate boards, or exactly what CalPERS considers to be "good governance."

With this in mind, we began the development of a set of corporate governance guidelines and principles that would guide today's corporate leaders. and serve as a standard upon which tomorrow's corporate leaders will be judged. As we began, we recognized the importance of additional perspectives on the issues in the broader corporate governance debate. In an open forum held last November, we asked other investors, and members of both corporate boards and management to share their thoughts and views on corporate governance and CalPERS role as a shareowner activist.

Among the speakers were Al Sommer and Alan Patricoff, both former corporate directors; Anthony Horan of Chase Manhattan; Marty Coyle with TRW Investment Management; Ralph Whitworth of Relational Investors – an activist fund that CalPERS invests in; Kurt Schact with the State of Wisconsin Investment Board; Michael Griffin of Director's Alert; and CalPERS own pension consultant Steve Nesbitt of Wilshire Associates.

Specifically, we asked them whether a single recipe for "good" governance can be prescribed, and what role investors such as CalPERS should play in the governance dialogue. Predictably, participants views varied.

Some offered praise of CalPERS role in the development of corporate governance and urged us not to give up, but rather to push forward with greater conviction. On the same note, some called on us to take larger positions within companies, to help exercise or influence, and to develop new mechanisms toward greater board representation. Others reminded us to keep our own house clean so that all times we truly practice what we preach. While others, suggested that we praise some of America's corporations that have adopted, and are practicing, good governance practices.

Most of all, a strong consensus agreed that while a "one size fits all" prescriptive approach to good governance is inappropriate, this doesn't not mean that corporate governance should be without structure at all. One overriding and consistent theme was uniformly accepted however: good governance depends upon strong, independent directors.

CalPERS listened and learned. With this information, we developed our U.S. Corporate Governance Core Principles and Guidelines and later adopted them in April of this year.

The principles and guidelines represent the evolution and ongoing development of CalPERS corporate governance program. They also represent the foundation for accountability between a corporation's management and its shareowners and will serve as a tool to further advance this relationship.

The principles include a definition of an independent director and a number of criteria that specify higher standards for individual directors. We believe:

• independent directors should comprise a substantial majority of seats on a board;
• no director may also serve as a consultant or service provider to the company;
• competing time commitment of directors should be specifically addressed by each company; and
• a mix of director characteristics, experiences, and diverse perspectives should be reflected on each board.

The core principles and guidelines also recommend potential duties for an independent chair and a lead independent director of a board.

CalPERS believes the criteria outlined in both the Principles and Guidelines are important considerations for all companies within the U.S. market. However, we do not expect nor seek that each company will adopt or embrace every aspect of each. We recognize that some of these may not be appropriate for every company, due to differing developmental stages, ownership structure, competitive environment, or a myriad of other distinctions. We also recognize that other approaches may equally – or perhaps even better, achieve the desired goal of a fully accountable governance structure.

Our hope is that these principles will further strengthen independence of America's boardrooms and influence the corporate governance movement toward greater consensus on corporate governance standards. We believe the accountability reflected in these principles is needed as American corporations compete in the next century.

One might ask: Why this extensive examination, at this time, in the development of corporate governance? Only time will tell. Nevertheless, we know this much. The evolution of corporate governance has been marked by a steady flow of reforms and milestones in history, and this impetus to reform -- in my opinion -- will drive the evolution and development of corporate governance onward.

Where is corporate governance headed?

The focus will be on the evaluation of individual directors. Are they people with integrity and diligence?; Are they people who are truly independent of management and recognize the value of that independence?

I expect that the boards of the future will be populated with people who have diverse backgrounds and international experience. The right skill mix will become an essential component of board composition.

Globalization will continue to cause countries to reassess and change their corporate governance systems. I believe this will provide an opportunity for CalPERS and other investors to share their experiences and ultimately influence what form corporate governance should take in a global market. CalPERS has already seized this opportunity. We have adopted an International Corporate Governance Program that focuses on the four countries with the System's highest equity exposure. These countries are Japan, France, Germany and the United Kingdom, where we own stock worth more than $11 billion.

Finally, I believe the director of the future will have to work ten times as hard as today. Directors will have more responsibility, and potentially more liability, than in any time in the past. As a result, we need to expect that some of our current directors will chose to withdraw. We will need to find quality replacements, and perhaps even consider the feasibility of smaller boards. We will need to squarely face the issue of director liability -- how much is appropriate to instill accountability, while not too much to discourage qualified participation.

We hope that our Principles and Guidelines stimulate healthy debate. To the extent that they evoke disagreement, may these disagreements be used to promote greater clarity of thought and ultimately greater consensus. Our overriding goal is to assert our voice and share our experience in corporate governance. By working with investors, we hope that our voice and experience can help America's corporate governance system grow in a way that maximizes long-term shareowner value.

Thank you. I'd be happy to answer any of your questions.