The US Senate has revealed its proposals to overhaul the American financial system through Senator Christopher Dodd’s “Restoring American Financial Stability Act of 2010”.
Across 1,336 pages the Bill outlines a series of remedies which it states will end “too big to fail” and restore responsibility and accountability to the markets.
Commentators have observed that the Bill has been watered down since Dodd’s initial proposals were released in November 2009. Others have been quick to condemn the proposals for affording the Federal Reserve with too much power. It’s fair to say that the passage of the Bill will be a rough one as Republican senators continue to oppose what has been dubbed the most sweeping financial reform since the Wall Street Crash of 1929 which heralded the birth of the Securities & Exchange Commission.
From a corporate governance perspective the key section to review is Chapter 9, in particular, section G, “Strenghtening Corporate Governance”. Here are a few key governance bullet points from the Senate’s announcement:
EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE
Strengthening Shareholder Rights
Giving shareholders a say on pay and proxy access, ensuring the independence of compensation committees, and requiring public companies to set policies to take back executive compensation based on inaccurate financial statements are important steps in reining in excessive executive pay and can help shift management’s focus from short-term profits to long-term growth and stability.
Why Change Is Needed: In this country, you are supposed to be rewarded for hard work.
But Wall Street has developed an out of control system of out of this world bonuses that rewards short term profits over the long term health and security of their firms. Incentives for short-term gains likewise created incentives for executives to take big risks with excess leverage, threatening the stability of their companies and the economy as a whole.
Giving Shareholders a Say on Pay and Creating Greater Accountability
- Vote on Executive Pay: Gives shareholders a say on pay with the right to a non-binding vote on executive pay. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.
- Nominating Directors: Gives the SEC authority to grant shareholders proxy access to nominate directors. Also required directors to win by a majority vote in uncontested elections. These can help shift management’s focus from short-term profits to long-term growth and stability.
- Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.
- No Compensation for Lies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.
- SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.