Buon giorno! It's a pleasure to be with you and to be here in beautiful Italy, momentary as it may be. It's always nice to escape the heat of California, both the climate and the politics.

I would like to thank Ambrosetti and Mr. Alessandro De Biasio who have honored me with an invitation to speak to you. It's important to gather like this to share ideas, experiences, and generate dialogue between our countries.

I appreciate the opportunity to appear before you in my capacity as a trustee of the California Public Employees' Retirement System (CalPERS) to discuss corporate governance. I'm here to speak to you about how standards of corporate governance are changing in the United States and around the world. I hope to persuade you that it is in our self-interest for market systems, democracy, and responsible private sector corporations to develop and thrive worldwide. Good corporate governance systems that recognize the interests and value of shareowners can be an adaptable foundation to achieve those goals.

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 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 how it has expanded internationally.

• Finally, I'd like to leave you with a few thoughts to ponder concerning the future of corporate governance globally, as we approach the 21^st century. In doing so, I want to reaffirm the importance of communication with shareowners and the need for corporate governance guidelines that stress independent board leadership from the perspective and experience of one institutional investor.

What is CalPERS?

CalPERS is America's largest public pension fund, and we're the second largest in the world. We manage assets totaling more than $134 billion, give or take a few billion depending on the dips each day in the world's markets.

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, 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, and one of the few that is nearly fully funded.

Our trust fund is managed by a 13-member Board of Administration, consisting of elected and appointed members including the California 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.

Although CalPERS manages $134 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 of every dollar in our fund comes from investments, with the remaining 30 cents coming from two sources: the taxpayers and the contributing 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 $40 billion in fixed income, $88 billion in equities and $6 billion in real estate. More than $? million of that is invested in Italy. (Bob, Investments is getting me a current number)

If I may, I would like to take a moment to address the volatility in the stock market, especially in the United States. I think it's an important topic, one that relates to our discussion today and the importance CalPERS places on corporate governance. Much attention has been given to the rise and fall of the world's markets. As a trustee of the largest pension fund in the United States, I'm often asked the question: How does CalPERS manage its investments during these volatile times?

A recent Associated Press article attempted to answer this question. I would like to share a few sentences with you.

"Sheryl Pressler has lost $11.5 billion in the stock market since July 17. But everyone is calm in her office in the headquarters of the nation's biggest pension fund.

…So in this roller-coaster market, what is the investment strategy of the nation's biggest pension fund? Interviews with officials suggest a three-part strategy: Stay the course, diversify and, to a lesser extent, look for bargains."

This story might be alarming to some. Nobody likes to lose money. However, it does indicate one simple fact -- CalPERS is a long-term investor. When we buy, we buy and hold.

We know the market gives and takes, and we anticipate market drops in our asset allocation process. We know market drops will occur; we just don't know when they will occur. We take the prudent approach of diversifying our fund to avoid potentially damaging prolonged drops in total value. If we didn't assume the risk of a drop, we wouldn't be able to earn the high returns we have enjoyed over the past several years.

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.

Our belief in being an active owner was especially evident last proxy season. We were vigilant in our proxy voting, casting votes on proxies for over 1,600 domestic companies with a market value of $60 billion and approximately 740 international companies with a market value of $24 billion.

We were successful during the season at many companies, but our activist efforts were especially highlighted at Sybase, a California-based software company and Marriott International. We received an unprecedented amount of support from shareowners of Sybase on our shareholder proposal that would urge the company to adopt annual elections for the company's board of directors. The proposal passed with the support of 67 percent of the votes cast.

We also sent a message to Marriott International and the Marriott family that we refuse to accept a stock structure that is less than hospitable to its shareowners. CalPERS and other shareowners were successful in defeating a Marriott International management proposal that would have created a dual class stock structure. Our actions served as a reminder to the Marriott family that we are the patient long-term capital of the company.

These actions are a necessary extension of our duties. 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.

To fulfill these duties, we use corporate governance activism to improve performance in the United States and just recently began to express our principles abroad in countries where we have the largest financial interests.

Corporate Governance is important. Our world is changing and forces are influencing corporations to compete globally for customers, suppliers, alliances, employees, assets, capital and shareowners. Our markets have converged into an efficient global trading economy where labor, products, buyers, sellers and owners have come together. Capital is swiftly and silently moving around the world. There is an instantaneous nature of telecommunications, making information available at the tips of our fingers.

Corporate governance is about credibility and accountability. Shareowners want to be assured of a board's independence from the CEO and its willingness to act in their best interests. They want a new system of "checks and balances" to replace entrenched relationships and the undefined corporate governance procedures of the past.

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, 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.

We began our corporate governance program in the early 1980's, as a direct response to the takeover frenzy in corporate America. It began simply as objections by a few shareowners to certain company actions that were considered to be self-serving. 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.

A debate quickly ensued over whether shareowners -- particularly institutional investors who were accused of being transitory and only interested in short-term profits - had a right to participate in decisions concerning the long-term viability of a corporation.

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 moved away from a specific-issues approach to focus on company performance. And we have been successful.

Our corporate governance program in the United States 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. With each company, there are internal forces who are working to effect necessary change. CalPERS, and other investors, represent catalysts for change; our attention on the company management acts to empower these internal change agents, who ultimately have the power to produce results.

It has been established that there is a positive and significant correlation between added returns to investors and the presence of a professional board with good corporate governance practices.

One of the most prominent studies of economic value achieved through shareowner activism thus far 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 the 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.

How do we pick these companies? I've provided a chart in your materials that summarizes the process. But let me give you the basic philosophy. We look at three factors when selecting the companies we target in our corporate governance program. These include:

• Market Performance
• Corporate Governance Practices
• Economic Performance

Our process selects companies which have suffered poor market performance relative to their industry peers, have corporate governance policies which are less than favorable to shareowners, and have suffered poor economic performance – or EVA -- economic value-added.

EVA is a new tool in our arsenal to improve corporate governance practices. EVA is a company's after-tax net operating profit, minus its cost of capital for one year. By using EVA and stock performance, CalPERS is able to ferret out companies where poor market performance is due to underlying economic performance problems as opposed to industry or extraneous factors.

We believe that the impact of the corporate governance movement within the United States goes beyond the stock price of the companies we target. No company – and no CEO of a company – 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.

Earlier this year, CalPERS Board reaffirmed this belief by adopting a set of US Corporate Governance Principles and Guidelines. I've provided a copy of these in your materials. These principles 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 providers 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 lead independent director of a board.

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.

As successful as corporate governance has been for CalPERS, we realized we could do even more. We quickly began turning our attention to the state of corporate governance in the international markets.

CalPERS entered into the international security markets in the late 1980s to seek better returns and achieve diversification of the Fund's investment portfolios. In December 1994, we decided to increase the System's asset allocation to international equities from 12 to 20 percent of the Fund's total portfolio.

The increase in international ownership has had a number of important consequences for CalPERS.

As the size of CalPERS international holdings began to grow, we asked ourselves -- if we are going to exercise our ownership rights to increase returns to our trust fund in the United States, should we not extend these efforts to our investment in the international markets? Given our fiduciary responsibilities, are we free to ignore international corporate governance?

At the same time, we recognized that the changing capital markets were 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. Our hope was to influence the discussion as these countries adopted corporate governance.

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 the study, we adopted a formal international corporate governance program in 1996 focusing on the four countries with the System's highest equity exposure: Japan, France, Germany and the United Kingdom.

We followed the study with the adoption of a set of global governance principles. The principles focus on six basic concepts that are fundamental to free and fair markets throughout the world. They also reflect the core of the corporate/shareowner relationship. However, they do not impinge upon the legal, economic and cultural traditions of each country. Specifically, the six Global principles address:

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

In order to narrow our focus, we've also adopted market-specific corporate governance for the United Kingdom, France, Germany and Japan. These principles are designed to complement the governance work already performed by investors within these countries -- the Cadbury Code and Greenbury Report in Britain, the Vienot report in France, the guidelines outlined by the Duetsche Schutzvereingung Fur Wertpapierbesitz – Germany's largest shareholder organization, and the principles identified by the Corporate Governance Forum in Japan.

Our Global, France, Germany, United Kingdom and Japan corporate governance principles are all in your materials. These principles embody the growth and changes inherent in the corporate governance systems of these countries. Ultimately, they will serve as a tool to assist us in monitoring our international investments while pursuing better corporate governance for the companies in which CalPERS invests.

Clearly, corporate governance has become a dominant and focused theme in the US and international markets, and increasingly abroad.

As we move into the 21st century, I would like to offer several final thoughts on the current corporate governance landscape and the importance of communication between shareowners and corporations.

Clearly, CalPERS has a "pocket book" interest in expending resources to investigate corporate functions. We have the power to effect change. We are international in scope, operate with great flexibility, and with government mandates act as fiduciaries for one million Americans. We possess the characteristics essential for an effective corporate monitor -- a growing party to whom management can be held effectively accountable.

In the future, I believe that 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. They will need to include people with international experience. The right skill mix will become an essential component of board composition.

I believe the director of the future will have to work ten times as hard than 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.

I believe corporations around the world will need to adopt good corporate governance practices to attract and retain foreign capital and compete globally. Global markets will only become more attractive to investors with corporate governance standards that are more representative of shareowners interests. Experience tells us that those willing to adapt and change will be rewarded.

Corporations will also need to be prepared when shareowners come knocking on their door. While corporations must be adaptive and remain flexible to industry changes, they must also have a well thought out process in place to address corporate governance issues. Most of all, corporations will need to keep fully abreast of the philosophies and strategies of their shareowners.

Frankly, a fuller understanding of the perspectives of major shareowners can help senior managers and corporate directors to identify both sources of market support and sources of concern.

CalPERS hopes that our US and international corporate governance program will stimulate further debate and discussion about proper corporate governance practices. There is no single solution to improving our corporate governance systems, but rather, a rich variety of available alternatives.

We will continue to be missionaries of good corporate governance, sharing our words, our experiences, and our ideas. We recognize that there are differences between our countries, but we embrace them.

I hope that I have been successful in sharing with you some of CalPERS perspectives and trends on the increasing role of corporate governance.

In my opinion, effective governance is essential to the healthy growth of capitalism. The present system in the United States and internationally must continue to change in order to survive in the dynamic capital markets of the world economy. Our world cannot afford corporate owners who do not recognize themselves to be responsible with the same tenacity and ingenuity they employ to assert their shareowner rights.

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

Molto grazie per il tuo attenzione, e buon fortuna! I'd be happy to answer your questions.