US president Barack Obama took his fight for financial reform to the heart of Wall Street this week and described the role of shareholders as “the last key component”.
As the US administration faces up to a tough fight in the Senate on Monday, Obama outlined his vision of a financial system that did not “have to choose between markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules that suppress enterprise and innovation.”
President Obama currently has a 59-41 Democrat majority over Republicans in the Senate, one vote short of what is needed to take the Bill forward. Republicans, who see the proposals as federal interference, have signed a letter saying that they will not back the legislation as it stands.
The US administration acknowledges that shareholders by themselves cannot reign in a ‘Too Big to Fail” banking sector but even leading Republicans, through Representative Darrell Issa, have admitted that “We need to empower the stockholders of public companies to better manage the package of pay and the incentive packages of their key executives.”
Shareholder rights in the US have been significantly eroded since the introduction of the SEC after the 1930s crash. Proponents of reform will therefore be encouraged to hear that shareholder rights are a key ingredient. Here’s what Obama said:
These Wall Street reforms will give shareholders new power in the financial system. They will get what we call a say on pay, a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the company in which they’ve placed their savings.
Opponents to increased shareholder rights in the US have long argued that such reforms smack of Federal interference in what has historically been left to the individual states to mandate. The argument over property rights becomes even more inflamed with suggestions that corporations will become prey to activist shareholders with deeply entrenched political agendas far removed from maximising shareholder return and board accountability.
The US is still a long way from getting a Shareholder Rights Directive or even a Comply or Explain governance framework owned by the market participants. Monday’s vote will be just another small step in enhancing shareholder protections. In the meantime the SEC has its own shareholder reform agenda under consideration which will proceed irrespective of Monday’s vote.