Today, Sen. Christopher Dodd (D., Conn.) unveiled the new financial regulatory reform bill, titled “Restoring American Financial Stability Act of 2010”.The 1,300-page bill is said to be weaker than anticipated, but it still addresses many fundamental parts of the financial crisis, including corporate governance reform. There was some speculation that these governance provisions were on the “chopping block” and would not make it into the final bill. But the fact that they remained is an indication that the government is beginning to take shareholder rights more seriously. What made it into the bill? See below for a summary of the corporate governance provisions:
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.
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